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The Guidelines of the Minister of Finance – do they clarify the withholding tax revolution?

The Guidelines of the Minister of Finance – WHT

On 19 June 2019 the Polish Minister of Finance published the long-awaited draft document with guidelines on the new withholding tax (WHT) rules ("Guidelines"). Among others, the Guidelines deal with the particularly controversial concepts introduced by the new rules, such as beneficial owner or due care.


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Beneficial owner

The Guidelines refer to one of the main reasons behind the introduction of the beneficial owner concept, which is to counteract what is known as treaty shopping. The treaty shopping practice is a violation of Polish law, as the benefits provided by the double tax treaties ("DTT") or directives should be enjoyed only by taxpayers (beneficial owners). The Guidelines explain that intermediary entities whose sole activity is the receipt of income and its transmission to the beneficial owner or to other conduit companies are not beneficial owners. As a way to prevent the treaty shopping practice, the Guidelines explain that the verification of whether the payment recipient is the beneficial owner should be made in respect of all DTTs, including those that do not envisage the beneficial owner clause. The first step of assessing the entitlement to treaty benefits is to identify who is the taxpayer, i.e. the person that actually obtains (realizes) income, and only then should the relevant DTT be referred to. The Minister of Finance supports this view with judgments issued by the Polish Supreme Administrative Court ('SAC') in cases issued on the ground of cash pooling1.

On the positive side the Guidelines confirm application of the so called look through approach based on which the Tax Treaty between Poland and the taxpayer’s (beneficial owner's) country of tax residence may be applied in the case where the direct recipient of the payment from Poland is not entitled to treaty benefits due to the lack of beneficial owner status. The Guidelines may also be satisfactory to entrepreneurs making payments to foreign collective rights management organisations. It is confirmed in the Guidelines that, as a rule, such organisations should be regarded as the beneficial owners of such payments.

Actual economic activity

When discussing this part of the definition of beneficial owner, the Guidelines introduce the concept of substance [Polish: substrat majątkowoosobowy]. The Guidelines do not define the concept itself but make references to similar concepts based on economic substance, which have been developed in the practice of international law (e.g. BEPS Report, Actions 5 and 6) and referred to in the recent CJEU cases1.

The Guidelines attempt to adopt a practical approach to the criteria of genuine business activities. These criteria can be either general (e.g. the existence of a structure that is separate from any economic reasons) or specific, depending on the type of business activities pursued by the entity concerned. The Guidelines also provide examples of circumstances under which certain entities may fail to meet the requirement in question. This applies, for example, to:

  • holding companies: the fact that an entity does not pursue genuine business activities may be indicated by, among others, a minimal property and personnel base, salaries paid to personnel engaged in managing high-value asset portfolios being too low in relation to their responsibilities, or the existence of intra-group cash flows that serve to transfer income from an operating company to its holding company as a way to avoid taxation or to reduce the taxable base;
  • shared service centres: to be regarded as actually pursuing business activities, the activities of the centre must not be limited to the process of mathematical dividing of the costs of services purchased by the centre among the companies that use the centre's services.

The clarifications in the Guidelines are, therefore, of highly general nature. It is the taxpayer that should decide what concrete criteria to apply in the particular case and how to prove that these criteria are met.

Due care

It is important to note the attempt to take a reasonable approach to this matter by indicating that when assessing whether due care has been exercised, it must be checked whether the withholding agent is related to the payment recipient and whether it is actually able to receive the necessary information from the recipient. This obviously means that higher standards of due care should be applied in relations between related parties. The required standard of due care also depends on the amount of the payment. It is reasonable for the withholding agents to take additional steps to verify the payment recipient, particularly if the payments to the same taxpayer during a tax year amount to "many hundreds of thousands of zloty". The Guidelines contain examples of questions that may be asked to the other party in a transaction as part of the due care obligation. The position of the withholding agent may be strengthened if the response to each of the questions is confirmed by appropriate documents, including documents from publicly available sources (trade magazines, databases). It is also indicated in the Guidelines that the withholding agent may use, as a form of protection, a report issued by an independent auditor or tax advisor regarding the business activities of the recipient. The Guidelines explain that tax authorities should apply the new provisions reasonably, considering what the withholding agent can actually do. Although such approach may sound optimistic, many taxpayers would prefer certainty of procedures they should follow, in order to ensure that they are not held liable for noncompliance with the law. The doubts of taxpayers and withholding agents that were not addressed in the Guidelines may be resolved on their own initiative through the application for an individual tax ruling. This route, however, is not possible in case of questions regarding the beneficial owner criteria as a result of the exclusion in the amended Article 14b of the Tax Ordinance Act as of 1 January 2019. In practice, it may be difficult to obtain a confirmation of how to deal with the particular situation, especially if tax authorities will refuse to issue such tax rulings, as they do in case of tax rulings concerning mandatory disclosure rules (MDR).


Although the Guidelines intend to ensure that the new provisions are not interpreted in a way that might constrain honest taxpayers, the reality is that new rules impose considerable burdens on entities that make crossborder payments. The Guidelines are, to a large extent, an explanation of why the new provisions are necessary rather than a guide on how to apply the provisions in practical situations. In addition, they fail to solve many practical problems, including whether the look through approach will apply, if the tax preferences depend on the existence of direct capital relations. Or how often it is necessary to verify the particular recipient, given the fact that any such verification requires gathering many documents and plenty of information? Or what documents should accompany an application for an opinion confirming the taxpayer’s entitlement to an exemption from withholding tax?

Let us hope that at least some of these issues will be addressed in the final version of the Guidelines.

1 SAC judgment of 20 October 2017, II FSK 2594/15; SAC judgment of 26 June 2018, II FSK 1674/16; SAC judgment of 30 November 2016, II FSK 3107/14; SAC judgment of 18 March 2016, II FSK 82/14.

2 CJEU's judgment of 26 February 2019, N Luxembourg 1 (C 115/16), X Denmark A/S (C 118/16), C Denmark I (C 119/16), Z Denmark ApS (C 299/16) v Skatteministeriet, ECLI:EU:C:2019:134, para. 90.

Katarzyna Trzópek, Manager in the International Tax Team at KPMG in Poland

Maciej Synowicz, Senior Consultant in the International Tax Team at KPMG in Poland

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