Are you a “beneficial owner” of the amount receivable or just acting as an intermediary obliged to transfer it to another entity? Are you conducting “actual” business activities? Do you have premises, staff or equipment in the country of your tax residence? These are just a few questions which foreign contractors can expect from Polish businesses paying a remuneration to them. The increased interest of Polish entrepreneurs results from the recent amendment to the Polish law in relation to withholding tax (WHT).
New regulations impose obligation on Polish tax agents (remitters of WHT) to act with “due diligence” while verifying the possibility to apply favorable rules of taxation resulting from double taxation treaties (DTT) or EU directives exemptions for payments between related parties. If such verification is unsuccessful—the “standard” WHT rate provided in Polish law applies (20 percent or 19 percent).
Furthermore, since 2019, in cases where remuneration payments exceed 2 million zloty ($524,405), a direct application of WHT exemptions provided in DTT (“relief at source”) is no longer possible. Instead, a new “pay and refund” system applies.
Verification of the Contractor
Until the end of 2018, if a foreign taxpayer wanted to enjoy preferential tax rates under the relevant DTT, he was obligated to present his tax residency certificate to the Polish contractor. However, since 2019 a tax residence certificate itself is not enough.
Presently, the Polish remitter must act with due diligence by verifying the possibility of applying WHT rate resulting from DTT. Thus, it is the Polish entrepreneurs’ duty to control their contractors in order to identify and avoid such undesirable phenomena as “treaty shopping” or “treaty abuse.” It is a very convenient solution for tax authorities but an aggravating one for entrepreneurs.
The key element of this verification is to confirm whether the contractor is a “beneficial owner” of the amount received. The concept of a “beneficial owner” is broadly known on the basis of DTTs as well as the Commentary to Organization for Economic Co-operation and Development Model Tax Convention.
Nonetheless, Polish tax law provides its own strict definition of that term. Accordingly, the “beneficial owner” is an entity that meets all of the following conditions:
- it receives payment for its own benefit and it individually decides on the use thereof and bears the economic risk associated with the loss of the amount receivable;
- it is not an intermediary, representative, trustee or another entity legally or actually obliged to transfer all or part of the amount receivable to another entity; and
- it conducts “actual” business activities in the country of residence (as an example, such entity has an establishment in which it actually conducts its business activities, does not create structures separate from from the economic reality, independently conducts its economic functions, including through the local management board, etc.).
In practice, it is crucial to obtain a statement from the foreign contractor that they meet all the conditions listed above. This is the reason why foreign entities may expect inquisitive questions from their Polish partners.
Nevertheless, a Polish WHT remitter cannot be satisfied with the statement itself, but should—acting with due diligence—verify on its own (if possible) the accuracy of the data provided by the contractor.
As an example, Polish entrepreneurs may ask for an excerpt from the contractor’s trade register (to confirm that a statement was signed by a person duly authorized to represent the said contractor) or a financial statement (to confirm “actual” economic activity).
Also, the verification described above will be applicable to transactions performed within an international group of related companies as well. The counterparty’s verification concerns not only the right to apply the provisions of relevant DTT but is also applicable to WHT exemptions provided in EU directives for related parties (e.g. exemption in respect of a dividend paid to a mother company or royalties paid to a sister company).
Those verification actions are not only undertaken in the interest of a foreign recipient—it is also in the best interest of the Polish tax agent. If the tax authorities find that due diligence has not been preserved, they may impose (as well as the standard tax rate of 20 percent) an additional 10 percent penal tax on the Polish company. Furthermore, penal fiscal sanctions are possible too.
What Else Has Changed?
The necessity of conducting a thorough analysis of the contractor is not the only important change.
Before 2019, an entrepreneur who paid the receivables subject to WHT used to have an opportunity to, somehow automatically, apply a reduced rate of tax resulting from DTT. If the payment qualified for an exemption or if a DTT concluded with another country so provided, the entrepreneur could not withhold any tax at all. This is called the “relief at source” system.
However, starting from 2019, this principle is not as ruthless. Now, payments to a foreign entity which exceed the threshold of 2 million zloty will fall under the “pay and refund” system. Under the new rules, an entrepreneur must withhold the tax and remit it to the tax office and must do so regardless of DTT provisions.
If, under such DTT or Directive, payments are eventually exempted from WHT in Poland or a lower rate should apply, remitted WHT can be recovered based on an application filed either by the nonresident or the Polish remitter. However, remitters may submit their application only if they have paid WHT from their own funds and have borne the economic burden of this tax.
Foreigners may also apply for WHT refund. However, they should be ready to face numerous obstacles the Polish government has prepared for them.
First of all, the whole refund proceedings are conducted in the Polish language. This means that there is a necessity of preparing refund application in the Polish language, as well as the obligation to translate all the documents attached to it (e.g. agreements and bank statements).
Furthermore, a refund application can be submitted only in the statutory electronic form which requires the Polish certified electronic signature.
Taking the above into account, it is difficult for a foreign company to recover unduly withheld tax with no support of a local tax adviser.
The possibility to refund the derived WHT does not change the fact that the “pay and refund” system affects cash flow significantly, mainly because the refund will be made within six months. Nonetheless, an application for a refund may trigger further investigation proceedings which may postpone that deadline.
Not Applying the “Pay and Refund” System—Two Options
There are two options available if one wishes to depart from the “pay and refund” system. Taking advantage of these opportunities gives the right to a direct application of favorable tax rules resulting from DTT but it is at the sole discretion of the tax remitter.
First, a WHT remitter may provide his own “statement” to the tax office. A WHT remitter has to declare in their statement—under severe sanctions—that they are in possession of all documentation required to apply favorable rules of taxation (e.g. that they have obtained and verified the nonresident statement concerning their status as a “beneficial owner”).
Furthermore, the Polish company is also obligated to declare that after analysis conducted with due diligence it is not aware of the circumstances that would disallow application of lower WHT rates or exemption. If such a declaration is not considered to be true, a sanction tax may be imposed on the taxpayer and the board members will be penalized.
Alternatively, with respect to intra-group payments of interests, royalties or dividends, the WHT payer may apply to the tax authority for its opinion. Such opinion is an official confirmation from the tax authorities that WHT exemption is applicable (however, opinion concerns only intra-group payments, exempted from WHT based on EU directives).
It is assumed that these options will be used infrequently, particularly in cases of unrelated parties where a Polish WHT remitter has to submit their own “statement.” To be honest, this is not surprising.
What should foreign taxpayers be doing to prepare for the changes?
- First of all, they have to be ready to provide their tax residency certificates, before receiving a remuneration from their Polish contractors. As a rule, those certificates have to be provided in their original form (i.e. if a paper-based certificate has been issued, its original should be delivered to the Polish entity).
- Moreover, foreign taxpayers have to closely cooperate with their Polish partners, when providing necessary statements they have been asked for. This will be done not only in the interest of the Polish WHT tax remitter, but also in the interest of the foreign taxpayer receiving payments. The Polish entities may refuse to apply favorable rules of taxation resulting from DTT, if they have any doubts whether the application of these principles is justified.
- Also, taxpayers must analyze their agreements concluded with Polish companies to check whether those contracts regulate who incurs the WHT economic burden. If an agreement does not provide the “net of tax clause,” foreigners should be ready to apply for the refund of the WHT deducted on their own, if the “pay and refund system” has been applied.
Piotr Wyrwa is a Tax Supervisor at RSM Poland