On June 19 2023, the European Commission issued a statement signalling legislative work on simplifying and synchronising members states’ laws on pay and refund withholding tax (WHT) procedures. The commission pointed out numerous bureaucratic obstacles and inconsistencies that enterprises encounter and result in significant losses.
The Polish WHT system fits well into the commission’s observations. Although there are just two basic WHT rates (in general, 19% for dividends and 20% for interest, royalties and intangible services), the system has been made much more complicated in recent years and the practice of the tax authorities makes it difficult to comply with.
Complexities of the Polish withholding tax system
Foremost, payments exceeding just PLN 2 million (approximately $500,000) per annum (summed for a particular recipient) – so the threshold is very low – are subject to a pay and refund mechanism. It is applicable to distributions to related entities, other than those of a service origin. In such a case, a basic rule is to first collect tax in the full amount and then a recipient (or, in cases involving a gross-up clause, a WHT remitter) may apply for a refund in a special, six-month-long procedure.
There are two methods to apply for a reduced WHT rate or an exemption at source, to avoid the application of the harsh pay and refund scheme. One requires the submission of a special statement (called a WH-OSC) by a WHT remitter that all the conditions of the WHT exemption/reduced rate are met. Any incorrect information provided in the statement may result in a 10–30% additional WHT fee, and potentially even personal penalties for board members. The other method is to obtain an advance ruling on a WHT exemption/reduced rate issued by the Polish tax authorities. The waiting time for such a ruling is six months.
An advance WHT ruling, a WHT refund procedure and the WH-OSC statement require the gathering of a lot of documentation and evidence, including on the beneficial ownership status of a payment recipient, with its major component being genuine business activity. Any doubts concerning the documentation may cause the tax authorities to ask additional questions and extend the deadlines for refunding WHT or issuing an advance ruling. Thus, it is of great importance to collect in advance all the necessary information, questionnaires, etc.
There is only one tax office and one appeal court (both in Lublin) to cater for the withholding tax issues of corporate income taxpayers. This causes an overload of work and an extension of the timelines for obtaining WHT rulings or refunds (in practice, it is closer to a year than half a year). Also, once an interpretation of the laws that is negative for enterprises is established, it can be overruled only at the stage of Supreme Administrative Court, which may take another 1–3 years.
What further complicates the issue for remitters and taxpayers is the lack of precise rules or guidelines on how to check the beneficial owner status of a recipient and which documentation the remitter must collect to satisfy the due diligence requirements. Official Ministry of Finance explanations on the Polish WHT rules are still in a draft version issued in June 2019 (since then, the work has been “in progress”). Thus, all the steps are undertaken based on the best practices of tax advisers or financial officers. However, there is still no certainty on, for example, how many employees/directors a holding company should possess or whether it should rent a separate office to be considered as running genuine business activity. In many, but not all, cases, the expectation of the substance goes far beyond the international standard.
It must be stressed that beneficial ownership and due diligence conditions are applicable not only to payments exceeding PLN 2 million, but to all others whenever a WHT rate other than basic is to be used. However, the level of diligence varies according to a scale and the nature of the remitter’s activity, as well as whether payments are made to related entities (in the latter case, the requirements are lower).
Key Polish question on the European Commission initiatives
The question is how any new legislative initiatives of the European Commission will influence the Polish WHT system.
So far, the work on a proposed Anti-Tax Avoidance Directive (ATAD 3) has reassured the Polish authorities that the beneficial ownership requirements should be set at a high level. The conditions for applying simplified European WHT procedures will be of the utmost importance. If they are simply carried forward from the projected rules of ATAD 3, the new opportunities may remain purely theoretical and, in general, the European Commission’s new statement and the ATAD 3 initiative seem to contradict each other.
Until detail is added to the European legislative work, the Polish WHT system shall remain complex and difficult to comply with. To handle it, significant time and resources must be allocated by concerned enterprises.
