Today (September 28, 2023) the Ministry of Finance published the long-awaited draft withholding tax (WHT) explanations regarding the rules for withholding tax collection. The project focuses on clarifying understanding of the beneficial owner requirement and the guidelines included therein will certainly affect the current practice of Polish tax authorities.
Scope of draft WHT explanations
The Ministry of Finance has already published a draft WHT explanations regarding the rules for collecting withholding tax in 2019. The purpose of the prior explanations was to explain the key concepts covered by regulations introduced by the act amending the PIT and CIT taxation as of January 1, 2019. One of key objectives of that prior draft WHT explanations was to present the proposed steps regarding proper fulfillment of the obligations arising from the introduced changes. However, despite public consultations and discussion on the draft, the project never entered into force.
The current draft WHT explanations is a fragmentary look at the concept of withholding tax collection, focusing on the beneficial owner concept. It also concerns the Directive on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States (the IR Directive) and the Directive on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (the PS Directive).
The project includes an exemplary list of premises that may indicate that the recipient of the payment is not its beneficial owner, but only acts as an income administrator. In the light of the project, the premises are that:
- the intermediary realizes a small margin on the transferred payments,
- at the level of the intermediary there is no actual taxation of income from received receivables,
- the sole subject of the entity's activity is receiving receivables and forwarding them,
- receivables are transferred to another entity within short time periods,
- payments of receivables occur periodically at regular intervals,
- the entity does not reinvest funds obtained in connection with received receivables,
- most of the entity's revenues come from cross-border financial payments made by related entities,
- there are significant items on the company's balance sheet in relation to foreign related entities,
- there is a multi-layered structure, where the subsequent shareholders are other intermediary companies,
- the receivable is transferred further to an entity that would not benefit from preferential taxation provided for in the DTTs or EU directives,
- there is a time connection between the establishment of the entity and a change in tax regulations guaranteeing tax privileges in another country,
- the entity is located in a jurisdiction with an extensive network of double taxation treaties or preferential rules of taxation of passive income received from foreign sources,
- withholding tax in the entity's jurisdiction in relation to payments to non-residents does not occur or occurs to a very limited extent,
- the entity is resident in a country highly ranked on the list of foreign direct investments in the territory of Poland, mainly due to cross-border financial payments rather than commercial or production activities, and at the same time there is no correlation between the size of this country's GDP and the scale of investments carried out from its territory.
The income administrator (an entity that is not the actual owner of the interest) is characterized as an entity whose right to dispose of the income is limited by the obligation to transfer the receivables to another entity. In the light of the draft WHT explanations, it does not have to be a legal obligation to transfer the receivable, it is enough to establish the existence of such an obligation based on the factual circumstances by examining, for example, the actual economic course of the transaction.
The draft WHT explanations indicate that an actual obligation to transfer receivables occurs, among others, when a given company does not have enough resources enabling it to change or terminate the legal relationship under which it is obliged to pay the receivable without simultaneous interference in the content of the obligation under which it itself receives the receivable. In this respect, an example of a situation was given in which the company granting the sublicense is not able to pay the license fee to the licensor if it does not receive payment from the entity to which it granted the license.
The draft explicitly states that with respect to dividends, the requirement of the beneficial owner should be examined as part of due diligence. Moreover, according to the draft, this requirement should apply to every DTT, regardless of the fact whether its wording includes the beneficial owner clause.
The draft WHT explanations also indicate that preferences under the DTTs and directives should not be granted to entities that do not conduct actual business activity. They emphasize that artificial nature, which eliminates the right to preferences, may also occur when an entity conducts real business activity but the transaction in which it participates is artificial.
The draft WHT explanations indicate that for the purposes of both DDTs and the directives, the definition of the beneficial owner under the Polish tax provisions should be followed.
According to the draft WHT explanations, tax authorities are not obliged to apply the look-through concept. The possibility of its application is basically limited only to cases in which the following conditions are jointly met:
- the use of an intermediary between the payer's country and the country of the recipient of the receivable who is the actual beneficiary does not result in a reduction of withholding tax collected in the payer's country;
- the nature (type) of payment made between the payer - the foreign intermediary - the foreign recipient of the payment who is the actual beneficiary is the same;
- the entire structure or payment is not artificial within the meaning of article 22c of the CIT Act.
The draft WHT explanations also explains how the condition of effective taxation provided for in the article 21 section 3 and the article 22 section 4 of the CIT Act should be interpreted, emphasizing the differences existing between the PS directive and the IR directive. According to the draft WHT explanations, this condition in the context of the dividend exemption should refer only to objective exemptions - as per type of entity (i.e. subjective exemptions - as per type of income - should not be taken into account).
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