Optical fibers as an industrial device subject to withholding tax in Poland

Polski

The dispute concerned the determination of whether optical fibers and colocation space should be classified as industrial equipment within the meaning of Article 21(1)(1) of the corporate income tax act (“CIT” Act). This issue is crucial for determining the obligation to withhold WHT on payments made to foreign contractors for access to and use of fiber optic networks.

Factual State

A company (the “Company” or “the Applicant”) whose business focuses on wired telecommunications applied for a binding tax interpretation. The Company has signed long-term agreements with foreign entities for the use of fiber optic cables and colocation spaces (places in buildings or structures where telecommunications cabinets are located, provided to the Company for installation, service, or maintenance purposes).

The Company wanted to ensure whether the fees paid for the use and maintenance of fiber optic cables and colocation spaces to foreign contractors are not subject to Polish withholding tax and, in particular, whether they constitute revenues for the use or the right to use an industrial equipment.

The company argued that optical fibers, as simple glass structures without mechanical components or power systems, do not constitute "industrial equipment" within the meaning of Article 21(1)(1) of the CIT Act. Moreover, other elements are necessary for optical fibers to fulfill their role. The provision of appropriate conditions in colocation space is merely auxiliary, more akin to leasing space than using industrial devices. To support its position, the Applicant referred to administrative court rulings  narrowing the understanding of the term "industrial" to devices functionally linked to those involved in the production process (e.g., favorable judgment of the Supreme Administrative Court on March 8, 2023, ref. II FSK 2382/20, concerning servers).

Position of the Director of the National Tax Information (NTI)

The Director of the NTI deemed the above interpretation incorrect. According to the authority, the concept of an "industrial device" is broad and includes all industrial products that fulfill specific functions, even if they are simple in construction. In this case, the function is long-distance data transmission. The authority therefore ruled that, in accordance with the purposive interpretation of Article 21(1)(1) of the CIT Act and broad application of such devices in the modern economy, fees related to the use of optical fibers along with colocation space are subject to withholding tax (interpretation of the Director of the NTI of 20 March 2024, ref. 0114-KDIP2-1.4010.77.2024.1.PP).

Stance of the Provincial Administrative Court in Warsaw

The Provincial Administrative Court in Warsaw, in its ruling of August 7, 2024 (ref. III SA/Wa 1129/24), did not agree with the Company's interpretation and dismissed the complaint.

The court sided with the authority, stating that the term "industrial device" should be interpreted broadly and, following the latest case law of the Supreme Administrative Court, cannot be limited only to industrial production processes. Furthermore, the court agreed with the Director of the NTI that these devices can relate to broadly understood business activities, including telecommunications services.

In the context of this broad definition of an industrial device, an optical fiber is not only the cable itself but also the final elements that make the service, which constitutes the essence of the business activity, possible. Consequently, the entire complex of this device, which constitutes the services offered  by the foreign contractors, must be considered an industrial device.

PwC Commentary

In reference to the described judgment, it is worth considering whether the interpretation adopted by the Director of the NTI and the court would be the same if the subject of the agreement, was the use of the capacity of optical fibers. According to the explanations included in point 9.1 of the OECD Commentary to Article 12 of the OECD Model Convention on Income and Capital Taxes, it is worth emphasising that under certain conditions, the mere use or right to use of the transmission capacity of a specific device should not lead to WHT taxation of payments.

It should be noted that Polish tax authorities and administrative courts present an unfavorable interpretation for taxpayers by expanding the interpretation of industrial equipment, primarily resulting in a broader scope of payments subject to WHT obligations in Poland.The interpretation of the Director of the NTI as well as the judgment of the Provincial Administrative Court in Warsaw are consistent with the previously presented line of interpretation regarding the concept of "industrial equipment" through the prism of using the equipment  in a broadly understood economic activity, regardless of the specific construction of the given device. For example, it should be pointed out that on this basis, the status of "industrial equipment" was also applied to the devices not directly related to industrial production, including cranes/hoists (see e.g. judgment of the Supreme Administrative Court of 18 May 2018, ref. II FSK 1403/16), forklifts (judgment of the Supreme Administrative Court of 26 April 2018, ref. II FSK 1018/16), seismic sensors and sand separators (judgment of the Supreme Administrative Court of 9 August 2017, ref. II FSK 1963/15).

The interpretation used by the Provincial Administrative Court in the described case may be repeated in other judgments in the future, which may affect numerous entities entering into agreements for the use of optical fibers, telecommunication cables, or other cables or devices used for data storage and transmission. Above all, it indicates a growing risk of challenging the settlements of such agreements on the grounds of WHT. To minimize this risk, it is worth analyzing contracts with foreign contractors regarding their qualification for WHT purposes and tax consequences resulting thereof.