Ministry of Finance draft guidance related to a new mechanism regarding withholding tax clarifies to some extent the approach which will be expected from remitters who have their registered office or place of residence in Poland, as well as non-resident recipients of payments sourced from Poland. Issues related to beneficial owner of a receivable, due care or conducting actual business activity should be now less uncertain.Agata Oktawiec, Partner
On 19 June 2019, the Ministry of Finance published a draft guidance relating to the regulations concerning the new mechanism of settlement of withholding tax (“WHT”). This document covers issues related to the purpose of modifying the mechanism of withholding tax, new definition of the beneficial owner, modified concept of due care, tax refund, establishing a threshold of 2m PLN and other specific issues.
As of 1 January 2019, the amending act concerning new mechanism of withholding tax came into force, however the introduction of most new regulations has been postponed until 1 July 2019. The amendment introduced:
- a new mechanism of settlement of WHT in relation to payments exceeding 2m PLN per annum for each taxpayer. In that case, the conditional exemption from WHT or application of the reduced tax rate stipulated in the applicable Double Tax Treaty will be restricted;
- the possibility of not withholding tax in relation to payments exceeding the limit of 2m PLN, if the remitter submits a statement confirming that he has the appropriate documentation and is not aware of the circumstances excluding the possibility of applying a reduced tax rate or exemption;
- the possibility of application to the tax authorities for an opinion confirming that tax may not be withheld;
- a new definition of the beneficial owner;
- modification of the content of the so-called specific anti-avoidance clause.
The explanations indicate the specific requirements relating to the beneficial owner, according to which the remitter should verify the status of the recipient. Recipient of the payment can be considered a beneficial owner only if he:
- bears economic risk of loss of received payment;
- decides independently on the use of the received payment;
- conducts actual business activity in the country of residence.
According to the content of draft guidelines, actual business conduct shall be understood as existence of a property (office, equipment) and personnel (management, employees) in that country. Ministry of Finance indicates that, in practice, conditions for conducting actual business activity will be different, depending on the type of activity. It means that conditions will be different for industrial or trading companies, and different for entities from service or financial sector. However, in some areas, these criteria will be universal, e.g. existence of an artificial structure which is has no economic reasons.
Another important issue is the due care, which remitter has to exercise during verification process. It is important to note that due care must be respected regardless of whether threshold of 2m PLN has been exceeded. Due care concerns in particular verification of received documents, tax residence of the recipient, as well as verification of the status of the taxpayer who earns income from the receivable and its beneficial owner. The assessment of due care should be made taking into account publicly available information related to the recipient of payments.
Draft of the explanations also covers issues concerning tax refund (a separate procedure was introduced for payments exceeding the limit of 2m PLN), as well as issues related to the threshold of 2m PLN.
What does this mean for me?
Direction of the explanations shows that remitters have to pay more attention to verification of the foreign recipients’ status, in particular when payments are made to holding companies, shared services centers and other entities located in jurisdictions with preferential withholding tax rates. According to the draft explanations, special due care will be also required for payments made to related recipients.
It should be noticed that published explanations are a preliminary version and Ministry of Financeinvites to make comments which have to be submitted by June 30, 2019. Any possible changes to the explanations should not adversely affect taxpayers and remitters of WHT.