General ruling - we know how the Ministry of Finance understands the “subject to tax without exemption” condition

On November 20, 2024 the Ministry of Finance published the general ruling that sheds light on a topic that has been the subject of numerous disputes between taxpayers and tax authorities during WHT proceedings. Namely, in order to apply WHT exemption under the Parent-Subsidiary Directive (“PSD”) a company receiving the dividend has to fulfill a condition of “being subject to tax without exemption”. The ruling explains the Ministry of Finance’s interpretation of this requirement which should be partly assessed positively, but unfortunately still leaves some ambiguity in certain areas.

The ruling focuses on the “subject to tax” condition, which has historically been interpreted by both tax authorities and administrative courts as the "effective taxation requirement". It does not address the application of provisions on countering tax abuse, including identification of the beneficial owner.

The ruling interprets two conditions for applying the WHT exemption implementing the PSD. According to the ruling:

• The condition listed in Article 22(4)(4), which states that a dividend exemption may be applied if the recipient “does not benefit from an exemption from income tax on all of its income, regardless of the source of its generation,” should not be interpreted as requiring that the dividend recipient needs to be effectively taxed.
• The fact that the dividend stream is not taxed in recipient’s home jurisdiction due to the application of the PSD exemption does not prevent the application of the WHT exemption in Poland (another view has been presented before, not only by tax authorities but also by some administrative courts).
• The following does not indicate that the subject to tax condition is not met: 
• profits are transferred through a chain of entities in such a way that the dividend is not taxed at least once within the EU or EEA when beneficial owner is a company with tax residence outside the EU and EEA or an entity that does not meet the definition of a company within the meaning of the PSD Directive; 
• the lack of income tax payment by the taxpayer in a given tax year results from their individual situation (e.g., offsetting a tax loss or earning income solely from dividends).

However tax authorities may scrutinize the above-mentioned issues from the perspective of anti-avoidance provisions.

The condition set out in Article 22(4)(2) of the CIT Act, referring to the need to be “subject to income tax on all of its income, regardless of where it is earned” in an EU (EEA) country, indicates that in order to apply the WHT exemption, the entity receiving the dividend should be a company subject to unlimited tax liability in Poland or another EU or EEA country. Therefore, to meet this condition, the entity should be resident for tax purposes in one of the EU or EEA countries.

In our view, the general ruling is in some aspects favourable to the taxpayer because:

• it clearly indicates that the fact that a dividend is exempt from taxation in recipients’ home country under the PSD does not exclude the possibility of applying the WHT in Poland; 
• it emphasises that the condition of Article 22(4)(4) of the CIT Act should not be understood as a requirement that the recipient of the dividend is subject to effective taxation.

However, it is not fully clear whether in light of the ruling, application of WHT exemption is conditional on the dividends ultimately being taxed in EU/EEA member state at some point (e.g. on distribution to individuals or non-EU entities). Additionally, the general ruling points out that upstream distribution by dividend recipients may be examined in the context of dividend anti-abuse clause, however it does not provide any further specifications.

What is now crucial, is to observe how the general ruling will affect the current practice of Polish tax authorities and administrative courts.

Works of Ministry of Finance expert groups

This general ruling is the result of the work of one of the working groups at the Ministry of Finance. Working groups were involved in consulting on selected issues related to the application of WHT regulations: beneficial ownership, the possibility of applying the look-through concept and the interpretation of the condition of ‘being subject to tax without exemption’ as a requirement for applying exemptions under the PS and IR Directives. It is expected that as a result of those group further explanations on WHT will be issued. 

Previous explanations in the area of WHT

The Ministry of Finance has already published draft WHT explanations regarding the rules for collecting withholding tax in 2019 and 2023. The purpose of the draft explanations published in 2019 was to explain the key concepts covered by regulations introduced by the amendment to the PIT and CIT laws as of January 1, 2019. On the other hand, the draft WHT explanations from 2023 placed emphasis on the concept of withholding tax collection, focusing on the beneficial owner concept. However, these drafts never entered into force.