As of 2022, a new mechanism for collecting withholding tax (WHT) obliges the tax remitters (Polish companies) to collect tax if the total amount of payments classified as passive (i.e. dividends, interest, license fees) paid in one tax year to one taxpayer exceeds PLN 2 million (so called “pay and refund” mechanism).
In order to apply WHT preferences and exempt payments from pay and refund regime, two solutions are possible:
- tax remitter has to submit a specific statement to the tax authorities (so called WH-OSC), or
- tax remitter (or the taxpayer) has to obtain a formal binding opinion of Polish tax authorities confirming that preferential WHT rate, or full WHT exemption, may be applied.
General information regarding applying for WHT binding opinion
Obtaining a binding WHT opinion is beneficial not only to continue the application of preferential WHT rate for payments exceeding the threshold, but also to decrease the administrative burden related with new WHT provisions (both on the side of the taxpayer and the Polish tax remitter) and to reduce the risk of the penal-fiscal liability of tax remitter’s board members and persons responsible for tax matters.
Although the pay-and-refund mechanism entered into force as of 2022, starting already from 2019 the taxpayers had the possibility to file an application for the binding opinion for payments where the EU Directives could apply (i.e. the Parent-Subsidiary Directive, or Interest-Royalties Directive concerning respectively license fees and interest, and payments for participation in the profits of legal persons). In 2022 the above rules were relaxed to allow not only the taxpayers, but also the tax remitters (Polish entities making the payments) to apply for an opinion, as well as to allow the application to be based also on the provisions of double tax treaties, instead of EU Directives only.
Generally, the Polish tax authorities have a statutory deadline of six months to issue the opinion, which, however, may be extended by the tax authorities. Once issued, the binding opinion is valid for three years counting from the issuance date (some exceptions apply for opinions issued before 2022 and in case of a change of significant circumstances constituting background for the opinion).
It is important to note that Polish tax authorities may deny issuing a binding opinion in the event of:
- failure by the taxpayer to meet the formal conditions specified in the CIT law and implementing the EU Directives, or the applicable double tax treaty,
- existence of reasonable doubts as to the compliance with the actual state of the documentation attached to the application, or the taxpayer's statement regarding the beneficial owner status,
- existence of a reasonable presumption that anti-avoidance measures apply to the transaction being subject to the application,
- existence of a reasonable presumption that the taxpayer does not conduct real economic activity in the country of its tax residence.
Additionally, it is worth highlighting that the applications filed within the 2019-2020 period were processed by various tax offices in Poland. Starting from 2021, due to changes in the scope of responsibilities of tax offices in Poland, all new applications are being analyzed by one dedicated tax office (i.e. Lubelski Tax Office in Lublin).
PwC’s observations regarding tax authorities’ and courts’ practice
Within the past four years PwC continuously supports the clients with filing the application for a binding opinion and in the process of verifying the conditions required under the so-called due diligence process (WHT due diligence). Within our business practice we have observed that the introduction of a dedicated tax office to handle WHT matters, has an impact on various aspects of how the applications are now processed.
We observe that due to the high amount of applications filed recently, the complexity of some cases and concentration of all activities related to analyzing the tax opinion application in one tax office, the time needed for issuing a binding opinion is in many cases longer than the statutory six months period (according to data for 2022, the average period of processing applications was 8 months, while in individual cases the period lasted a year or even longer). In practice, we have observed cases where the binding opinions were issued within the statutory deadline, however given that the process of preparing an application, gathering and translating source documentation is time consuming, we recommend starting the process way ahead of the payment date.
Secondly, we observe that the introduction of a tax office dedicated to WHT matters, resulted in a greater specialization and scrutiny of the tax authorities regarding applications filed. Taking into account that the knowledge in this regard is concentrated in the Lubelski Tax Office, we observe a more detailed approach to applications and information included therein, as well as a more meticulous analysis of source documents, resulting in follow up questions (focusing in particular on the taxpayer's real economic business activity and beneficial owner status).
Our experience shows that until now the vast majority of applications for the WHT preferences are positively considered (i.e. binding opinions are issued). Nevertheless, we have recently observed a change in the position of the tax authorities and we are aware of cases where the Lublin Tax Office refused to issue an opinion and such refusals were subsequently appealed to the administrative courts.
The first judgments related to the above appeared in December 2021 and in July 2022. Then, in the second half of 2022, the Provincial Administrative Court increased the frequency of judgments issued. Currently (as at April 2023) we are aware of at least 11 positive court judgements (which ruled in favor of the taxpayers / tax remitters) and 18 negative ones. At the same time, the majority of above court judgements remains not yet binding and it can be expected that as a result of appeals they will be considered by the Supreme Administrative Court. It is worth noting that there are already two judgments issued by the Supreme Administrative Court regarding refusals to issue an opinion (of February 8, 2023, reference number II FSK 1277/22 and II FSK 1281/22), which were positive for the taxpayers.
In the negative court judgments known to us, the court referred i.a. to insufficient real economic activity of the taxpayer, as well as doubts regarding the application of anti-avoidance measures. We are also aware of a few negative decisions addressed to holding companies and investment funds (for example verdict of WSA dated 21 September 2022 r. ref. I SA/Lu 316/22), where the tax office argued that the company / fund does not meet the formal conditions to apply WHT preference, which are specified by CIT provisions implementing the EU Directives. In the above-mentioned refusals, according to the tax office’s standpoint the recipients of dividends did not meet the condition of not benefiting from income tax exemption on their total income, regardless of the source they are earned. In tax authorities opinion, the above results from the fact that the dividend recipients obtained only income from securities (shares) subject to exemption (i.e. they did not achieve other income that would not be subject to exemption), even though the recipients did not benefit from subjective (general) tax exemption.
In our opinion, the above is a sign of an increasing scrutiny of the tax office towards (i) complex corporate structures which, however, are not directly aimed at tax avoidance, as well as (ii) atypical structures (such as investment funds functioning in special tax regimes) in case of which the foreign tax regime they operate may be complex. Here, we would like to highlight that even in the case of refusal to apply preferences to structures with the participation of foreign funds, in the case of selected investment structures, it is still possible to apply full exemption from corporate income tax on the basis of separate mechanisms, e.g. subjective exemption specified in the CIT Act (depending on the degree of comparability of foreign investment funds).
Taking into account the above, filing the application for a binding opinion should be preceded with a detailed analysis of the state of facts, documentation available as well as the status of the payment recipient, in particular in the context of recognizing him as the beneficial owner, his business activity, income obtained and the method of taxation. The above is important in particular due to the inconsistent line of jurisprudence of the courts and the judgment of the Supreme Administrative Court indicating the requirement for the tax remitter to verify the beneficial owner status of the dividend recipient as part of due diligence analysis (ref. II FSK 1588/20).
At the same time, in case of companies which have already obtained a binding opinion, it is important that within the period of its validity, the tax remitter verifies if any circumstances regarding the taxpayer (in particular conditions for preferential WHT application) have changed, as such changes may invalidate the opinion.
Due to PwC's experience in providing support in the area of applications for WHT opinions, in particular in preparing applications including key information from the authorities' perspective and analysis of documentation supporting the facts described in the request, if you have any questions regarding the subject matter, please contact us.
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