Withholding tax is a tax which the remitter is obliged to collect when withdrawing recievables on certain grounds, e.g. on interest, for advisory services, legal services, management and control, or dividends to a non-resident.
The remitter may apply a reduced WHT rate or not collect the tax at all, if allowed by a tax treaty or by specific regulations. Then the remitter is required to hold a certificate of tax residence and exercise due diligence.
So far, the due diligence assessment has taken into account the nature and scale of the activities carried out by the remitter. According to the Polish Deal provisions, due diligence will also be assessed through the prism of the relationship between the remitter and the taxpayer. This means that in the case of payments of receivables between related entities, a higher standard of due diligence will be expected, as entities within capital groups have greater access to specific information regarding other entities in the group.
Changing the definition of “beneficial owner”
For WHT due diligence, it is also important to determine the beneficial owner of receivables. According to the new provisions, the definition of “beneficial owner” will change. Thus an entity that is an intermediary obliged to transfer all or part of the receivables to another entity, would not be regarded as the beneficial owner. The current version is narrower, as it indicates that the obligation to transfer all or part of the receivables to another entity should be legal or factual.
If the total amount of receivables paid on the foregoing basis exceeds PLN 2 million in the tax year for the same taxpayer, the remitter will be obliged to collect WHT according to the tax rate resulting from the CIT Act on the surplus over PLN 2 million.
Under the bill, the pay-and-refund mechanism will not be applied to all income earned in Poland by non-residents subject to withholding tax. The catalogue iss narrowed to revenue generated:
- From interest, copyright or related rights, rights to inventive designs, trademarks or ornamental designs, including from the sale of those rights, from compensation for disclosure of a secret of a recipe or production process, for use of or the right to use an industrial device, including means of transport, a commercial device or a scientific device, or for information associated with industrial, commercial or scientific experience (know-how)
- From dividends, and other income from participation in the profit of legal persons with their registered office or management in Poland.
The pay-and-refund mechanism will apply to the aforementioned revenue only when such receivables are paid to a related entity.
Moerover, it should be noted under the proposed new Art. 26(2ec) of the CIT Act, the pay-and-refund mechanism will also be applied to receivables that, without justified economic reasons, were not classified as receivables covered by this mechanism.
Opinion on the application of exemption = Opinion on the application of preferences
Opinions on the application of an exemption are to be replaced by opinions on the application of preferences, due to the extended scope of these opinions. Both the remitter and the taxpayer would be able to apply for an opinion.
Even if the receivables were covered by the pay-and-refund mechanism, based on an opinion on the application of preferences it would be possible to:
• refrain from collecting tax in accordance with a tax treaty
• apply the rate resulting from a tax treaty, or
• apply exemptions under the CIT Act (Art. 21 (3) or 22(4)).
Remitter’s declaration for use of relief at source
Under the changes, the pay-and-refund mechanism would not apply if the remitter submits a declaration that:
- The remitter holds documents required by tax law to apply the tax rate or the tax exemption or non-collection resulting from specific regulations or tax treaties,
- After the verification referred to in point 1, the remitter does not have grounds for believing that there are circumstances excluding the possibility of applying the tax rate or for the exemption or non-collection of the tax resulting from specific regulations or tax treaties.
Such declaration is to be made by the head of the entity within the meaning of the Accounting Act, stating the function performed by the declarant. According to the provisions, if an entity is managed by a multi-person body, the declaration is to be made by one or more authorized representatives. An attorney will not be entitled to submit the declaration.