A law amending Poland’s personal income tax and corporate income tax laws, tax code, and some other laws will change the treatment of cross-border transfers of dividends, interest, and royalty payments as of January 1, 2019.
The law (dated October 23) was published November 23.
There are three possible scenarios for withholding tax under the new rules:
- If the total amount of dividends, interest, and royalties paid to the same foreign beneficiary does not exceed PLN 2 million (about $529,400) in the tax year of the payee, the reduced withholding tax rates (under the relevant income tax treaty) or withholding tax exemptions (under the EU parent-subsidiary directive or interest and royalties directive) are applied directly, provided that the foreign beneficiary provides the payee with the relevant tax residency certificate and a statement confirming that the formal conditions for the withholding tax exemption have been fulfilled.
- If the total amount of dividends, interest, and royalties paid to the same foreign beneficiary does exceed PLN 2 million in the tax year of the payee, the payee must apply the full statutory tax rate — 19 percent for dividends or 20 percent for interest and royalty payments — to the amount exceeding PLN 2 million, unless the foreign beneficiary or Polish payee applies for and receives a formal opinion from the relevant tax office confirming that the withholding tax exemptions (under the parent-subsidiary directive or interest and royalties directive) may be applied by the payee. The formal opinion must be issued by the tax office “without unnecessary delay,” and no later than six months after the application date. There is a fee of PLN 2,000 for the opinion, which is generally valid for 36 months. The tax office may refuse to issue an opinion if there is a justified assumption that the foreign beneficiary does not conduct a real business activity in the residence country or is not a true beneficial owner of the payments, the conditions for withholding tax exemptions have not been fulfilled, etc. The foreign beneficiary must provide the payee with the relevant tax residency certificate and a statement confirming that the formal conditions for the withholding tax exemption have been fulfilled.
- If the total amount of dividends, interest, and royalties paid to the same foreign beneficiary does exceed PLN 2 million in the tax year of the payee and the payee applies the full statutory tax rate to the amount exceeding PLN 2 million, but the formal opinion from the relevant tax office was not obtained before the payment to the foreign beneficiary was made, a withholding tax refund application must be filed with the relevant tax office, along with various attachments and formal statements, by the foreign beneficiary. The tax office, before deciding about the withholding tax refund, is, inter alia, required to contact the tax administration of the foreign beneficiary’s residence country to verify that the beneficiary does in fact conduct a real business activity in that country, that the conditions for withholding tax exemptions have been fulfilled, etc. The refund must be issued no later than six months after the application date.
The new regulations also define a beneficial owner as an entity that simultaneously fulfills all of the following criteria:
- it receives payment for its own benefit, including the right to self-determine the use of the payment, and bears the economic risk related to the loss of the payment in full or in part;
- it is not an intermediary, representative, or other entity that is legally or factually required to transfer the full (or a partial) payment to another entity; and
- it conducts a real business activity in its country of residence, if the payments are received in connection with a business activity.
The relevant provisions state that the beneficial owner will be considered to conduct a real business activity if, in particular:
- the registration of a foreign controlled corporation (FCC) is related to the existence of an enterprise that actually performs activities constituting business activity, including maintaining an office, qualified personnel, and appropriate equipment used in the business activity;
- an FCC does not form a structure apart from economic reasons; or
- there is a reasonable relation between the scope of activities of the FCC and an office, personnel, and equipment; the agreements concluded by the FCC are in accordance with the economic reality, have a business justification, and do not, in an obvious manner, contradict the general business interests of an FCC; or the FCC fulfills its basic business functions by itself, using its own resources, including the management personnel present on site.
There is also a large set of new reporting obligations for the Polish payee regarding payments made to foreign beneficiaries.
Janusz Fiszer, partner, GESSEL Attorneys at Law, Warsaw, and associate professor, Warsaw University School of Management
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