Change of withholding tax collection mechanism in Poland
Starting from 1 January 2019 the amendments of Corporate Income Tax Act and Personal Income tax Act came into force. Whereas the provisions about withholding tax (hereinafter: WHT) were slightly modified, the Polish legislator decided to introduce the new system of tax collection with respect to application of withholding tax exemption and reduction of tax rate. Now practised relief at source, in certain cases the application of exemption or tax rate reduction will be possible on request only, after the full amount of tax is paid.
The new provision is aimed to increase the state budget revenues through increasing control over payments underlying WHT, sealing tax collection and limiting WHT frauds. The change of provisions, however, was made without any consultation with entrepreneurs or organisations of tax advisers and bookkeepers. After the wave of press publications criticising the way the new rules were introduced and highlighted the practical problems resulting from this unclear provision, the Polish government decided to give the taxpayers time for adaptation to the new provisions. The application of new provision is postponed by Regulation of Minister of Finance till 1 July 2019, and in some cases even till 1 January 2020. This time should be used by entrepreneurs to prepare the new due diligence procedures in their companies, to discuss and possibly also amend their contracts with foreign contractors, and to agree within the group the possible strategies regarding WHT collection.
The old rules will still apply…
According to the old provision in the case of payments of dividends to Polish or foreign shareholders, or in case of payments to foreign recipient generally, the payer was obliged to collect 19% (dividends) or 20% (other payments specified in Polish provisions, among others: interests, royalties, management fees, remuneration for licenses, know-how but also remuneration for advisory services).
From Polish Income Tax Acts follows in general one exemption introduced by so-called “Parent-Subsidiary Directive”. However, this is only applicable to EU and Swiss recipients. If the parent-subsidiary exemption could not be applied, the recipient still has the possibility to benefit from exemption / tax reduction following from provisions of an appropriate Treaty for the Avoidance of Double Taxation (hereinafter: DTT). Once the Polish payer was provided by recipient with documents required (tax residency certificate, statement confirming beneficial owner status), the exemption from withholding tax or tax reduction is applied. The payment to foreign entity was made in full amount or after collection of reduced WHT amount.
This mechanism will still apply – but only to the payments (from all WHT taxable sources of income) made during the tax year to one recipient, when the total amount of payments does not exceed the threshold of PLN 2 million (approximately EUR 480,000). For payments above this threshold, the new rules shall apply.
What this is all about?
The Polish taxpayers are firstly obliged to control the amount of payments made during the year to determine if the threshold was exceeded and determine which WHT collection rules are applicable: the old or the new rules. After exceeding the threshold, the Polish taxpayer is generally obligated to collect withholding tax on the whole amount, which means applications of 19% or 20% withholding tax rate as provided in Polish tax provisions. The tax shall be collected on the day of payment and transferred to the appropriate tax office. As a general rule, the application of reduced tax rate or exemptions from Polish provisions or DTT will not be possible at source.
What does it mean in practice?
For example: a Polish company was paying interest of PLN 3 million every year to an unrelated Swiss company. So far, the Polish company used to receive a tax certificate from the Swiss creditor, and applied 5% tax rate, withholding tax amounted to PLN 150,000. After the application of the new provisions, the Polish company will be obliged to collect (from the same interest amount paid) PLN 300,000 (PLN 2,000,000 X 5% = PLN 100,000 plus PLN 1,000,000 X 20% = PLN 200,000). As a result, the Swiss company will receive PLN 150,000 less.
Higher withholding tax paid…is it recoverable?
Fortunately, Poland is still bound by DTT and EU provisions, therefore the application of exemptions or tax reductions resulting from domestic or international tax law cannot be excluded. The application of exemption to the payment exceeding PLN 2 million however will be made on request only.
The recipient will have the right to apply for withholding tax overpayment refunds. In cases where the Polish company acts as the tax collector, they have to bear the costs of withholding tax instead of the foreign recipient and the Polish company will be allowed to apply for a refund as well. It will be required however, that such covering of costs of WHT by tax collector is explicitly agreed between all the contracting parties.
The application along with documents (proving the meeting of exemption / tax reduction requirements) is to be submitted electronically, the refund shall take place within 6 months from submitting the application, however this deadline can be postponed in cases when the application is incomplete or the tax authorities have doubts regarding the case. Any change made to applications equates to a new application being submitted resulting in missing the deadline from the beginning. The detailed formal requirements for applications shall be specified in Regulation of Minister of Finance but at the moment the regulation has still not been issued.
Exemptions from obligatory withholding tax collection
The withdrawal from obligatory collection of withholding tax in full amount is possible in two options only:
- The application of exemption from Parent-Subsidiary or Interests & Royalties Directive. This exemption can be applied at source when the payer is in possession of so-called “Opinion about application of exemption” issued by Polish tax authorities. This Opinion may be obtained by the recipient or by payer (if he is bearing the costs of WHT according the contract). The tax authorities may however refuse the issuance of the opinion (in case of certain doubts regarding the right to application of exemption). The opinion shall be issued within 6 months after submission of application. Once received, it will be binding for a maximal of 36 months under the conditions that the facts of the case presented in the application remain unchanged during this period. Worth to mention, that possession of opinion itself does not release the payer from obtaining the usual documents required for an application of exemption (tax certificate, statements). If all described requirements are met, the payer is allowed to apply the exemption and to not collect the WHT.
- To release the Polish payer from the obligation of withholding tax collection is submission of statements about possession of all documents required by law for application of tax exemption or tax rate reduction, about conducting with proper due diligence the verification of requirements for tax exemption and about the lack of knowledge “justifying the assumption, that the circumstances excluding the possibility of application of exemption or reduction of tax rate are existing”.
The statements shall be made by the Polish payer, however, in limited liability companies they have to be made by all members of the management board. The statements shall be submitted to the tax authorities electronically before the payment takes place. If statements are false, apart from criminal liability of board members, the company will be punished with additional tax penalties of 10% of amount paid, from which the payer did not collect withholding tax or collected it but using the reduced withholding tax rate. Taking into consideration the consequences presented above, the statement option is unlikely to be chosen for transaction with related entities or contractors for one-off transactions.
For more information, contact:
Advicero Nexia, Poland