Although some of the amended provisions will not become effective before 30 January 2020, since 1 January 2019 withholding tax remitters have been required to exercise the due care if they aim to apply preferential withholding tax treatment (e.g. exemption from tax or a reduced withholding tax rate under a double tax treaty). Consequently, a Polish withholding tax remitter is required to verify whether the beneficiary of a payment may be considered as the beneficiary owner of the payment, and this verification should include also its business substance.

To determine whether an entity actually conducts a business activity, it is necessary to consider the Corporate  Income Tax Act provisions (or, as the case may be, the Personal Income Tax Act) governing controlled foreign companies (“CFCs”), where the new requirement has been defined for income tax purposes. Importantly, although the purpose of the beneficial owner provisions is different than that of the CFC provisions, both are intended to prevent the same type of violation, including the use of artificial companies and/or artificial transactions in tax settlements.

According to the draft document on withholding tax guidelines dated 19 June 2019 ("Explanatory Notes"), the fact whether an entity actually conducts a business activity in a particular country and whether or not the entity is eligible for any of the preferential tax treatments provided for in the relevant double tax treaty ("Tax Treaty"), should be determined by the existence of that entity's property and personnel substance within that country.

A lack of such substance in the entity's country of establishment may indicate that the entity does not conduct a business within that country. This, in turn, may indicate the existence of an artificial business structure which, in accordance with OECD's guidelines, should not enjoy the benefits of a Tax Treaty (e.g. a reduced tax rate).

Given the above, when assessing whether or not an entity actually conducts a business activity, it is necessary to consider, in particular, whether

• a business undertaking exists in that country as part of which the entity is actually engaged in activities that may be considered as business activities. This includes, in particular, whether the entity has any business premises, qualified personnel or equipment used in the conduct of business activities;
• the entity does not maintain any structures other than for economic reasons;
• the scale of the business conducted by the entity is proportionate to the premises, personnel or equipment actually possessed by the entity (e.g. whether the entity's personnel resources are adequate to the entity's role or to the scale of its business for instance  it would be impossible for only one person to be an efficient decision-maker in the management of several companies engaged in business activities);
• the agreements entered into by the entity are economically genuine, have an economic justification and are not obviously in conflict with the general economic interests of that entity;
• the entity performs its core economic functions independently and using its own resources, including managers available on the premises of the entity.

The biggest uncertainty when interpreting the guidelines concerns the nature of holding companies. According to the Explanatory Notes, the fact that a holding company has one or two employees, or that their qualifications are insufficient, or their salaries are inadequate to their work duties, or the fact that the company has no permanent access to premises, equipment and software necessary for its decision-making, may result in that holding company not being considered by Polish law as having sufficient business substance.

The criteria for considering that a company actually conducts a business activity should be different for manufactures, trading companies or service suppliers and different for companies engaged in the broadly defined area of financial activities (e.g. investing or holding activities). As a result, the guidance for holding companies should certainly be made more precise in that regard, as the activities of such companies are, in principle, very limited.

In conclusion, a conduction of an actual business activity of a contractor within their country should be analysed in detail if a preferential withholding tax treatment is applied as lack of an actual business activities of that contractor may result in this contractor not being considered as a beneficial owner of the payment. Nevertheless, even if the conduction of the actual business activity requirement is met, it does not automatically mean that the contractor will meet the definition of beneficial owner, as they have  to meet all the other requirements that are currently in place to be considered as beneficial owner.

Grzegorz Ziółkowski, Manager in the Tax M&A Team at KPMG in Poland