On 1 January 2019 the provisions of the Polish Corporate Income Tax Act on withholding tax ("withholding tax" or "WHT") were amended. However, the Ministry of Finance has already postponed the effective date some of the new WHT provisions twice this year. Below we present the most frequent practical concerns resulting from the new provisions – both these being already effective and these waiting to take effect due to extended vacatio legis.
The new WHT provisions include the requirement for withholding agents to exercise due care in verifying the possibility of applying a reduced tax rate or an exemption in respect of payments subject to withholding tax. Unfortunately, no clear definition of the due care requirement is provided. Although the Ministry of Finance has attempted to explain this definition in the draft document with guidelines on the new WHT rules, there is still no step-by-step instruction for withholding agents. The due care is another vague term and its interpretation will have to be settled by courts. If it was impossible for the legislator to clearly define the obligations of taxpayers in this regard, it is all the more difficult for taxpayers.
One way for a withholding agent of avoiding the obligation to collect withholding tax on certain payments (e.g. dividends or interest) is to obtain an opinion confirming the taxpayer's entitlement to an exemption from WHT (so called WHT clearance opinion).
Such an application may be filed by the taxpayer or the withholding agent (if it is the withholding agent that bears the economic burden of the withholding tax). Foreign entity that is the taxpayer (beneficial owner) may also apply for a WHT clearance opinion.
The first obstacle for a foreign taxpayer is to fill in an electronic WH-WOZ form (application for a WHT clearance opinion must be submitted electronically). In this form, the taxpayers must provide their Polish tax registration number (known as NIP). However, it is unusual for foreign taxpayers to be registered for tax purposes in Poland and to have such a number assigned, if they do not pursue any business activities in Poland. Therefore, the foreign applicant will have to apply for a Polish tax registration number before applying for the WHT clearance opinion.
The challenge is also to gather documentation confirming foreign entity’s economic substance and the fact that it is the beneficial owner of the payment concerned. The Polish CIT Act does not contain an exhaustive list of documents to be submitted together with the application for the WHT clearance opinion, and no such documents are listed in the draft guidelines issued by the Ministry of Finance. It is, therefore, the taxpayer's responsibility to decide what documents should be submitted with the application and what documents it needs as evidence of its beneficial owner status.
The purpose of a cash pooling arrangement is to optimise the use of the financial resources of a group of companies.
In practice, the efficiency of such arrangements is reduced, as tax authorities refuse to grant the pool leader the protection provided for in the double tax treaties on the grounds that the pool leader is not the beneficial owner. However, within most cash pooling arrangements, it is impossible to precisely identify the owner of the funds used by the company that needed funding.
It is important to note at this point that the idea behind the beneficial owner requirement is to prevent tax avoidance. It could apply to a cash pooling if the pool leader within the arrangement was a company established in a particularly privileged tax jurisdiction. However, the location of the pool leader is, in principle, based on purely business-related reasons. In such cases, the way that tax authorities interpret the beneficial owner requirement in relation to cash pooling arrangements results in the requirement being applied for purposes for which it is not intended.
Neither the new WHT provisions nor the guidelines on the provisions have been used by the Ministry of Finance to address these problems. Quite the contrary, the stricter criteria of the beneficial owner of a payment make it even more difficult for groups of companies to manage their financial resources.
The Ministry of Finance originally decided to postpone the effective date of the new provisions until 1 July 2019. It seems that the decision was a result of the hasty changes made to the Corporate Income Tax Act, for which the Ministry of Finance, taxpayers and withholding agents alike were not prepared. The market was surprised to learn that the effective date of the new provisions would be deferred yet again, until 1 January 2020. The new date was specified in a regulation published a few days before the previously planned effective date.
Moreover, the fact that the Ministry of Finance has not postponed the effective date of similar withholding tax provisions in the Personal Income Tax Act has led to a situation where different legal regimes apply for similar practical situations. The way that the new withholding tax provisions are being implemented raises questions about the quality of the legislative process. While entrepreneurs have had to make intensive preparations for the new law, the Ministry of Finance has decided, at the last minute, that putting the new provisions to work was not as urgent as the Ministry's initial efforts might have indicated.
It is important to stress again that the quality of the legislative process, which includes introducing regulations that are absolutely necessary and in a way that builds trust of a taxpayer to the system, is crucial to offer the taxpayers the optimum conditions for doing business. The instability of the Polish tax system has been an issue brought up by Polish and foreign businesses for years. The chaotic implementation of the new withholding tax provisions is another ground for these allegations.
Szymon Bernat, Manager in the International Tax Team at KPMG in Poland
Marta Korc, Consultant in the International Tax Team at KPMG in Poland
Agnieszka Stępniewska, Consultant in the International Tax Team at KPMG in Poland
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