Withholding tax (WHT) is an issue that keeps many entrepreneurs engaged in transactions with foreign contractors awake at night. This specific taxation mechanism imposes an obligation on Polish companies to withhold tax on certain payments made to non-residents—from interest, through license fees, to advisory or advertising services. Correct classification of transactions and the exercise of due diligence are key to avoiding costly mistakes. Check how these regulations work and withholding tax—what services it covers.
From this article you will learn:
- Withholding tax – what is it?
- Withholding tax – what services does it cover?
- Who is subject to withholding tax?
- Summary
Withholding tax – what is it?
Let us start with the basics: withholding tax - what is it? WHT (Withholding Tax) is a flat-rate income tax collected by payers that have their registered office, place of residence, or a so-called foreign permanent establishment in the country where the income arises. In practice, this means that a Polish company paying certain amounts to a foreign contractor must independently withhold the appropriate amount of tax and remit it to the tax office. This mechanism operates within both PIT and CIT.
It is important to understand that WHT withholding tax is a tool enabling Polish tax authorities to effectively collect tax from non-residents. Without this solution, enforcing tax liabilities from foreign entities would be extremely difficult or even impossible. Therefore, the legislator shifted the burden of responsibility to the Polish payer, who becomes a kind of intermediary between the foreign taxpayer and the tax authorities. It is the Polish company that bears the financial consequences for failing to withhold or remit the due tax amount.
Standard withholding tax rates in Poland amount to 20% for most intangible services and license fees, and 19% for dividends. However, there are mechanisms allowing these rates to be reduced or the tax to be fully exempted. Double taxation treaties concluded by Poland with other countries often provide more favorable conditions, provided that the contractor presents a valid tax residence certificate. Without this document, the payer is obliged to apply the domestic rate.
Withholding tax – what services does it cover?
You already know what withholding tax is. Remember, however, that the catalogue of payments subject to withholding tax is strictly defined by regulations. Not every payment made to a foreign business partner is subject to this mechanism—the withholding obligation applies only to specified categories of income. Knowing this catalogue will allow you to correctly classify transactions and avoid unnecessary complications. So, withholding tax, what services does it cover?
The most important payments subject to WHT include:
- interest paid to foreign entities,
- license fees and payments for copyrights and related rights,
- remuneration for the use of trademarks and industrial designs,
- fees for making know-how and trade secrets or production processes available,
- remuneration for the use of industrial, commercial, and scientific equipment,
- fees for advisory, accounting, legal, and advertising services,
- fees for market research, management, control, and data processing services,
- remuneration for employee recruitment and personnel acquisition,
- dividends and other income from participation in the profits of legal persons.
Special attention should be paid to intangible services. Withholding tax—what services it covers—is a question that requires case-by-case analysis of the nature of the service. Services of a similar nature to those listed in the act may also be subject to taxation, which often gives rise to interpretative doubts. If you conduct international transactions and need support, make use of professional tax advisory services that will help you correctly classify payments.
In the case of license fees and equipment rental, it is also important to analyze the definitions contained in the relevant international agreement. Different treaties may define concepts such as “royalties” or “business profits” differently, which directly affects the obligation to withhold tax. Therefore, merely determining that a payment relates to a service included in the statutory catalogue does not end the qualification process - it is also necessary to verify the provisions of the relevant bilateral agreement.
Who is subject to withholding tax?
The obligation to settle withholding tax rests with every entrepreneur making payments to non-residents for services subject to WHT. The size of the company or the legal form of the business is irrelevant. Both large corporations and sole proprietors must comply with the same regulations. If your company cooperates with foreign contractors, whether you purchase software licenses, use advisory services, or pay dividends to foreign shareholders, you should be familiar with the rules governing the withholding of this tax.
Special requirements apply to payments exceeding PLN 2 million annually to the same recipient. In such cases, especially when the entities are capital-related, the pay-and-refund mechanism is often applied. It involves withholding tax at the full domestic rate at the time of payment, after which the foreign taxpayer may apply for a refund of the overpaid amount. However, it is possible to apply preferential rules already at the payment stage, this requires the payer to submit an appropriate statement or obtain an opinion on the application of an exemption from the tax authority.
A key element of proper WHT settlement is exercising due diligence. Since 2019, regulations explicitly impose on payers the obligation to verify contractors and documents entitling them to apply a reduced rate or exemption. When assessing due diligence, the nature and scale of the business activity are taken into account, as well as the new definition of the beneficial owner of the income. If you need support with WHT withholding tax, outsourcing accounting services can relieve you of complex formal obligations. At KR Group, we offer comprehensive assistance in preparing due diligence procedures tailored to the specifics of your industry.
Summary
Withholding tax - what kind of obligation is it, and why does it require your particular attention? It is a mechanism that places responsibility on Polish companies to withhold and remit tax on payments made to foreign contractors. Proper classification of transactions, exercising due diligence, and knowledge of international agreements help avoid costly mistakes and sanctions from the tax authorities. Remember that financial liability for failing to withhold WHT rests with the payer, which is why professional support is worth considering. Contact us, we will help you safely handle WHT settlements and take advantage of available tax preferences.
