On 19th June 2019, the Polish Ministry of Finance published the draft tax clarifications on the new withholding tax regulations (WHT). Read about the five most important issues raised by the Ministry!
The Ministry of Finance’s draft clarifications on the WHT are available at the following link (in Polish only). The deadline for filing comments on the draft was 30th June 2019. It is nice that the Ministry of Finance has published anything at all and that we have (as many as) 11 days to make ourselves familiar with the guidelines before the regulations come into force.
We should note that new regulations were to come into effect on 1st January 2019, however, due to a very short period given to adapt to these regulations, the amendments were postponed twice. Most amendments to withholding tax regulations will not come into effect until 1st January 2020.
? I wrote about the amendments in the article WITHHOLDING TAX IN 2019 — CHANGES AHEAD!
Clarifications on the WHT — what does the Ministry of Finance clarify?
The draft clarifications focus on explaining the term of the most significant issues such as a beneficial owner or due diligence. In the draft, the Ministry of Finance refers very broadly to international law, including the Commentaries to the OECD Model Convention and the judgments of the CJEU. The fact that practitioners refer to OECD’s commentaries is very pleasing – maybe finally the tax authorities will cease to deny the existence of these guidelines in conducted proceedings.
Unfortunately, in my opinion, the clarifications, since based on international tax law, are impossible to get through for an ordinary business operator who would like to know whether and pursuant to what principles they are to withhold the tax.
Below I present the most important issues raised by the Ministry.
#1 Tax clarifications on the Polish withholding tax – beneficial owner / actual recipient of receivables
Every entity paying receivables subject to withholding tax (regardless of whether the limit of PLN 2,000,000 is exceeded or not) must verify whether the entity which receives the receivables is their “actual recipient”. To put it very simply, such an actual recipient is an entity to whom the payments are due and not the one who is just an intermediary.
Payments made to the so-called “shell companies” – i.e., companies that do not run any business at all and do not have adequate facilities – are not payments made to the beneficial owner.
Therefore, in the Ministry’s opinion:
- payments to holding companies – in principle they will not be payments to the beneficial owner,
- payments to Shared Service Centre – will be payments to the beneficial owner,
- payments to Copyright Management Institutions (i.e., Polish entities like ZAIKS, KOPIPOL, PASF) are payments to the beneficial owner.
#2 Tax clarifications on Polish withholding tax – due diligence
The first question is what is this due diligence in case of the WHT? To put it simply, due diligence in WHT is to be understood as actions that allow us to confirm whether and on what principles are we allowed to charge a lower tax than the one resulting from the standard rate (e.g., 5% instead of 20% or 19%).
In draft clarifications the Ministry of Finance several times indicates (in keeping with the legislation) that due diligence is to depend on the nature and scale of taxpayer’s business. Different obligations will still apply to a business operator generating a turnover over PLN 50 thousand a year, and different to the one with a turnover over PLN 500,000 or PLN 5,000,000.
According to the Ministry of Finance, the larger the entity and the higher the transaction value, the larger the number of obligations. Traditionally, payments to affiliated entities are under special scrutiny.
The Ministry of Finance grades the due diligence scale – we can divide it into three grades:
Grade 1 – small entities, small payments
In this case, it seems that in order to exercise due diligence, it should be sufficient to collect the certificate of residence and statements required by law. And, of course, it is necessary to remain “alert” and see whether we learn something about our client that prevents us from applying the reduced rates.
Grade 2 – medium or large payments or filing a declaration on the verification of the right to apply reduced rates
Apart from steps in grade 2, it is necessary to verify the actual place of business, the status of the entity that receives the payments, etc.
Here, the Ministry of Finance de facto recommends sending a “questionnaire” to the counterparty containing questions about their business and obtaining an external auditor’s opinion on the counterparty’s status.
Level 3 – affiliated entities
We must verify everything and always. We verify financial statements, transfer pricing documentation (local file, master file, CbC, etc.).
#3 Tax clarifications on the WHT – withholding tax refund in Poland
WHT refund and absence of a gross-up clause
The Ministry of Finance confirmed in their clarifications that WHT refund can still be applied for even if the contract does not contain a gross-up clause, but it was us who paid the tax, and we were forced to do so by the counterparty.
The Ministry stresses that in such a situation we should describe the reason the tax was paid with our own resources and provide a confirmation that the tax was in fact paid with these resources.
Refund of the WHT collected on the amount under PLN 2 million
Practically it may happen that a single payment made to the counterparty exceeds PLN 2,000,000 just by itself. In such case, the tax can be refunded in two ways – in two different proceedings:
- On recognising overpayment and on the refund thereof – concerning tax charged on the amount under PLN 2,000,000, and
- On WHT refund in special CIT/PIT act procedures – concerning tax charged on the amount over PLN 2,000,000.
After all, nobody said it’s going to be easy!
#4 Tax clarifications on the WHT – how to calculate the limit of PLN 2,000,000?
The Ministry indicates that when calculating the limit of PLN 2,000,000:
- payments covered with an opinion on the application of exemption should not be included (which is strange, as there is no legal provision in this respect), and
- we should include all payments within a given tax year – not a calendar year.
#5 WHT clarifications – withholding tax can be a tax-deductible cost!
In their draft clarifications, the Ministry of Finance confirmed that if the withholding tax is paid in connection with contractual provisions – the so-called gross-up clause – then the withholding tax paid this way can be considered a tax-deductible cost. If there is no gross-up clause in the contract, WHT cannot be considered a tax-deductible cost.
On whether the tax can be a tax-deductible cost, despite the above position expressed in the clarifications, I write in detail in the article “Can withholding tax be a tax-deductible cost?
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NOTE: What I am discussing is the draft of clarifications – it is unknown when the final version of clarifications will be published. Complying with draft clarifications does not provide the same level of protection as complying with final clarifications.
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If after reading the clarifications, you have any doubts or want to make sure that the counterparty verification procedure you apply is correct, leave a comment with a question or message me at (marcelina@msztax.pl).
