What will change?
A new mechanism for collecting withholding tax, known as the pay-and-refund mechanism, will be used. Under this mechanism, a Polish entity making certain payments, including among other things payments of interest, dividends, licence fees, and fees for certain intangible services, to a foreign entity, in a total amount exceeding PLN 2 million (during a tax year), is required to collect withholding tax on the excess amount above PLN 2 million at the basic rate, e.g. 20% or 19%. Then, after the withholding tax is collected, the foreign entity can apply for refund of the withheld tax if it is entitled to a tax exemption or application of a lower tax rate.
As a rule, exceeding the threshold of PLN 2 million will make it necessary for the tax remitter to deduct and pay the withholding tax without the possibility of not collecting the tax based on the relevant tax treaty, or to apply exemptions or special rates arising out of specific regulations or a tax treaty.
Methods have also been introduced allowing withholding tax to be collected under the rules in force prior to introduction of the new pay-and-refund mechanism, i.e., methods for avoiding the obligation to collect the tax immediately:
- Filing a declaration on maintaining due diligence—but this does not provide remitters complete safety
- • Applying for an opinion on application of an exemption—this is quite costly (PLN 2,000) and can be applied only to an exemption from taxation of interest, licence fees and dividends.
- Maintaining due diligence in verifying the right to apply an exemption or a lower rate of withholding tax, in accordance with the draft tax clarifications dated 19 June 2019.
In maintaining due diligence, measures must be taken relevant from the perspective of applying the given tax preference in the specific instance. In particular, this involves:
- Verification of documents received for consistency with the facts
- Verification of the tax residency of the recipient of the payment
- Verification of the status of the counterparty as a taxpayer who obtains income through the receipt of the payment, as well as the beneficial owner of the payment, including in terms of the actual commercial activity conducted by the recipient.
In assessing due diligence, the nature and scale of the business pursued by the tax remitter should be taken into account, as well as connections to the taxpayer and the actual ability to obtain the relevant information.
- Tightened definition of beneficial owner. . It is essential to receive a declaration confirming fulfilment of the conditions for being regarded as the beneficial owner of the entity to whom the payment was made.
- New pay-and-refund mechanism. If withholding tax is collected by the tax remitter, the taxpayer will be able to apply to the tax authority for refund of the tax. The remitter will also be entitled to apply for a refund if it has paid the tax out of its own funds and incurred the economic burden of the tax. As a rule, refund of the tax should be made without undue delay, but no later than six months after receipt of the refund application.
- Refundability of the tax will be determined by the tax authority.To verify the correctness of the tax refund, an investigative proceeding will be conducted. If no doubts arise, the tax authority will refund the tax without issuing a decision. Documentation justifying the correctness of the refund must be enclosed with the refund application.
- Opinion on application of exemption. At the request of a remitter which has paid the tax out of its own funds and incurred the economic burden of the tax, the tax authority will issue an opinion on application of an exemption from collection of the flat-rate income tax on payments made to a given taxpayer, as referred to in Art. 21(1)(1) or Art. 22(1) of the Corporate Income Tax Act (i.e., dividends, interest, or licence fees). The authority has 6 months from receipt of the request to issue an opinion, and the opinion will be valid for 3 years.
Considering that the tax authority has 6 months to issue an opinion on application of an exemption, and the postponed regulations will enter into force at the start of July 2021, it is worthwhile now to prepare for this new mechanism for collection of withholding tax.
It should also be pointed out that transactions resulting in payments to foreign entities may trigger reporting obligations under the Polish regulations on reporting of tax schemes (Mandatory Disclosure Rules). We recommend an analysis in each instance of whether a transaction resulting in a payment to a foreign entity constitutes a tax scheme. Failure to comply with the MDR regulations is subject to financial sanctions as well as fiscal criminal liability.