The Ministry of Finance on 19 June 2019 published a long-awaited draft of explanatory notes with respect to the withholding tax provisions (effective in 2019).
Certain withholding tax collection rules were effective 1 January 2019; however, application of some of these withholding tax provisions was partly postponed until 30 June 2019.
Overview of withholding tax rules
The new withholding tax rules (effective 1 January 2019) stipulate that the basic model is that the tax remitter (party remitting the tax) must collect withholding tax using domestic rates, and without consideration of deductions that may be available under EU directives or applicable income tax treaties. Refund claims for the withholding tax may be made afterwards.
There is an exception to the general rule. The tax remitter may use a relief-at-source mechanism if a statement or request for a clearance opinion is filed. This process relates to payments made to one taxpayer that in the aggregate exceed PLN 2 million (approximately U.S. $1.07 million). Regardless of the amount of the payment, the tax remitter must exercise “due care.”
Lastly, the definition of the beneficial owner is specified in more detail.
Role of explanatory notes during draft phase
The explanatory notes (draft) are an attempt by the Ministry of Finance to explain the withholding tax rules and explain how taxpayers and tax remitters are to apply the new rules. Following the explanatory notes may afford certain protection (similar to that when acting in line with tax rulings). However, because of the general nature of the explanatory notes and the multitude of factual situations, the explanatory notes may, in practice, not provide such a protective role.
The Ministry of Finance stated with regard to the explanatory notes that the document does not modify the principles of previous rules for determining the withholding tax (exemptions, rates, etc.), and the notes direct the tax authorities to apply the regulations after taking into account rationality and real possibilities available for the tax remitter to collect and present evidence and to analyze a taxpayer's situation.
Comments on the draft explanatory notes (approximately 40 pages) are due by 30 June 2019 (viewed as being a very short deadline).
Tax collection and refund guidelines
The (draft) explanatory notes confirm that taxpayers must calculate the potential excess of the PLN 2 million threshold—regardless of the fact that some provisions were postponed until the end of June 2019. In other words, all payments must be summed up from the beginning of January 2019, regardless of the taxpayer’s tax year-end, and if the payment made after 1 July 2019 exceeds the threshold of PLN 2 million together with the payments made earlier, the tax amount is to be collected pursuant to the new withholding tax rules.
Concerning how to apply the new rules for payments to “transparent entities,” the Ministry of Finance expects that the threshold of PLN 2 million will be applied to payments to individual partners of such an entity.
However, if taxpayers (tax remitters) want to obtain a refund of the amount of tax paid, they will have to initiate two separate procedures—one for receivables below PLN 2 million and the other for receivables above this threshold (even if it was a single payment).
Tools for "relief at source"
The guidance from the Ministry of Finance confirms that the statement for the reduction (exemption) of the withholding tax must be made, at the latest, on the day of the payment. It will therefore no longer be possible to assert the benefits of EU directives or income tax treaty provisions (and to collect tax residence certificates after the end of the relevant year). The guidance also explains the method of signing such a statement in instances of a multi-person management board (e.g., the electronic signature of one member of the management board is required and enclosing a copy of the document with statements of the others). However, the guidance still provides no explanation as to how to sign the documents concerning company branches or entities with a management board consisting also of corporate entities.
With regard to application of an exemption (that allows the use of a withholding tax exemption up to 36 months), the explanation notes provide that the Ministry of Finance will not oppose submission of statements under Article 26(7a) after requesting the opinion and before obtaining it. It has been confirmed that the clearance opinion will not apply to the benefits from the income tax treaty but only to the benefits (exemptions) from the EU directives.
It will be possible to apply for an opinion (similarly, to apply for a tax refund) by both the taxpayer and the tax remitter, if the tax remitter has incurred the cost of the tax from its own resources. The Ministry of Finance will not expect the contract to include a gross-up clause if the need to gross up is necessary for the business situation. However, in another part of the explanatory notes, the Ministry of Finance has confirmed that there is a right to deduct the withholding tax cost for corporate income tax purposes only in respect of the existing gross-up clause and not in respect of the "business" gross-up. Taxpayers, therefore, need to examine the content of the existing gross-up clauses in existing contracts.
Beneficial owner and genuine business activity
The Ministry of Finance expects that the “beneficial owner” test also must met for payments that do not reflect an income tax treaty provision.
Much of the text has been dedicated to intermediaries in the context of the beneficial owner test. The use of a "conduit company" as an “intermediary” may lead to negative consequences for many business areas (e.g., brokers) that conduct certain activities and are responsible for the payment they receive.
The guidelines provide information for entities operating shared services centers or collective rights management organizations.
The explanatory notes acknowledge differences in gathering information and documentation from related parties and from non-related parties. As regards related parties, the Ministry of Finance expects to collect detailed information such as financial statements or about the organisational structure or information on employees and their qualifications.
Following the due care standard will be necessary regardless whether or not the payments exceed the threshold of PLN 2 million. The Ministry of Finance has proposed to introduce safe harbours for payments of smaller amounts. For example, for payments not exceeding several tens of thousands of PLN, due care would be maintained by possessing a certificate of tax residency. If the payments do not exceed several hundred thousands of PLN, it would be sufficient to obtain a certificate and a statement on satisfying the conditions for tax exemption. Still, higher standards of due care are expected.
Certain challenges may arise for entities making payments to jurisdictions that do not impose withholding tax on outgoing payments (such as Cyprus, Malta or in some cases the Netherlands).
Read a June 2019 report [PDF 234 KB] prepared by the KPMG member firm in Poland
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