Intangible services and the hidden dividend

Organ wydający:: WSA Rzeszów
Data:: 2024-10-24
Sygnatura:: I SA/Rz 380/24

In non-final ruling of October 24th, 2024, the Provincial Administrative Court in Rzeszów ("WSA") confirmed the tax authority's position that the payment for intangible services incurred by a Polish company to a German shareholder in fact constitutes a dividend.

Background

The subject of the judgement (not yet in law) was, among others, the tax authorities' reclassification as hidden dividend of some of the costs of the intangible services inncurred by a Polish company for its sole shareholder. These payments for the services were described by the Polish company as "participation in headquarter's costs", including IT services (SAP/SJS project), use of the "S.4" trademark, use of know-how, and legal services. The WSA has agreed with the tax authority that the Polish company had failed to adequately demonstrate that these expenses might be treated as tax deductible costs. In particular, there was a lack of appropriate documentation (e.g., lack of trademark or know-how license agreements, detailed agreements for IT or legal services). The company had failed to prove that the parent company had indeed provided mentioned services to the Polish company and that the expenses were incurred for the purpose of generating revenue or maintaining or securing a source of revenue.

The "settlement matrices" presented by the Polish company, which were a form of settlements imposed by the shareholder, could not replace evidence of actual provision of the services.

Since the actual provision of services was not proven, and the payments were made to the shareholder, the WSA agreed with the tax authorities that these amounts constituted payments from a share in the profits of legal entities, i.e., hidden dividends. Therefore, a 15% withholding tax should have been collected on these reclassified amounts in accordance with Article 22, paragraph 1 of the CIT Act and Article 10, paragraph 2, letter b of the Polish-German Double Taxation Treaty.

What conclusions follow from the ruling?

Every transaction with a related entity (e.g., services, use of trademarks, know-how, etc) should have a written agreement and reliable evidence of its actual performance (e.g., reports, timesheets, project documentation).
A company in Poland should be able to demonstrate that the expense incurred was necessary to generate revenue or secure a source of revenue, and that the company derived a specific benefit from it.
Payments to the sole/dominant shareholder that are not clearly documented as expenses are particularly vulnerable to being considered a hidden dividend.
In the absence of evidence of the performance of services and their connection to business activity, there is a risk that the value of the acquired services will be excluded from tax-deductible costs, resulting in tax arrears and the need to pay interest.