The look-through approach (LTA) is served as a kind of lifeline for entities that paid dividends, interest, or royalties abroad.
Exemption from withholding tax is possible if the conditions strictly defined in the CIT Act are met collectively. One such condition is the requirement to demonstrate that the entity receiving the payments, primarily in the form of interest and dividends, is the beneficial owner of those payments. Similar rules also apply to the application of preferential tax rates provided for in double taxation treaties to which Poland is a party.
The problem arises when the payment goes to an intermediary (e.g., a parent company), which then forwards it further (e.g., to a grandparent company). In such cases, according to the look-through approach, the fulfillment of the exemption conditions should be examined in relation to the beneficial owner of the payments (e.g., the grandparent company) rather than the direct recipient (e.g., the parent company).
The look-through approach is not regulated in tax law.
Important!
Despite the look-through approach is not regulated in tax law, the Ministry of Finance had accepted its applicatin. In the draft tax guidelines regarding the rules for withholding tax collection from June 19, 2019, in point 2.3., it was indicated that in cases where the beneficial owner of the payment is "another entity (which must be demonstrated or verified), the provisions of DTT (our explanation: double taxation treaties) or domestic laws implementing EU directives relevant to the residency state of that entity (i.e., the look-through approach) will apply to withholding tax."
The draft was not binding and was never finalized, the support of the Director of the National Tax Information Office for the application of the LTA concept was evident in numerous individual tax rulings, such as those from June 14, 2022 (0111-KDIB2-1.4010.128.2022.2.AR) and April 11, 2024 (0111-KDIB1-2.4010.80.2024.1.AK).
Negative individual interpretations
In 2023, negative individual interpretations also began to appear, reflecting the changing position of the tax authorities. The culmination of this shift in approach was the release of a new draft of guidelines (still a draft) on September 25, 2023, in which the Ministry of Finance clearly indicated in point 2.3. that regarding the look-through approach, "tax authorities are generally not required to apply this concept. The possibility of applying this concept is essentially limited only to cases where the following conditions are met collectively:
- The use of an intermediary company between the payer's country and the country of the payment recipient, who is the beneficial owner, does not result in a reduction of withholding tax collected in the payer's country
- There is identity in the nature of the payments in the relationship between the payer, the foreign intermediary company, and the foreign payment recipient who is the beneficial owner
- The entire structure or the specific payment is not artificial under Article 22c of the CIT Act
Explanatory notes
The Director of the National Tax Information Office (Polish: KIS) is referring to the latest explanatory notes, which are not binding law, in recent individual tax rulings concerning both dividends and interest or royalties, for example:
- May 2, 2024, No. 0114-KDIP2-1.4010.104.2024.2.PP
- August 9, 2024, No. 0111-KDIB2-1.4010.301.2024.1.BJ
- August 9, 2024, No. 0111-KDIB2-1.4010.217.2024.1.BJ
In these rulings, the Director of the National Tax Information Office explicitly states that the Ministry of Finance's position on the look-through approach has changed compared to the views presented in the draft tax guidelines from June 19, 2019.
Not only the tax authorities are citing arguments against the application of the LTA concept. The jurisprudence of administrative courts is also inconsistent. In a ruling from December 20, 2023 (I SA/Lu 633/23), the Provincial Administrative Court in Lublin ruled that "this concept is not explicitly presented in the applicable provisions of the CIT Act concerning withholding tax," and therefore, it should not be applied in the case.
What's next?
The lack of a consistent line of court rulings and the absence of a final version of the tax guidelines raises doubts as to whether defending the application of the LTA concept will involve a lengthy legal process, the success of which is hard to predict. Therefore, we recommend a thorough analysis of the status of the beneficial owner of payments made by your company, particularly to foreign related entities.
