2019 will be another year of significant changes in taxes. Some of them will also apply to the withholding tax. The obligation to exercise due care or the obligation to withhold tax despite being in possession of a residency certificate are just some of the changes we will have to deal with.
IMPORTANT NOTE: the Ministry of Finance has postponed most of the new regulation till 31st December 2019. The regulation related to utmost dilligence on verification of the beneficial owner and the tax residency of the business partner are however fully in force.
As a reminder, withholding tax is a flat-rate income tax that is applied to amounts payable to foreign entities. This tax applies to interest, dividends, royalties and the so-called intangible services.
To learn more about withholding tax, please see the article “What is a withholding tax?”
A limit of PLN 2,000,000
The entire withholding tax regime has changed with the introduction of the limit of PLN 2,000,000. This limit applies to the aggregate amount payable to a given entity and subject to withholding tax. It doesn’t matter whether we can apply an exemption or a reduced tax rate – the limit applies to amounts due (i.e. fees, interest, dividends, etc.) that are paid abroad.
NOTE: THE AMOUNT OF PLN 2,000,000 REPRESENTS THE AMOUNT PAYABLE AND NOT THE AMOUNT OF TAX!
So if during the tax year a counterparty received, e.g. PLN 500,000 on account of interest, PLN 500,000 on account of royalties for the use of trademarks and PLN 1,500,000 on account of, for example, management services, then the amount of PLN 500,000 will be subject to more stringent treatment – i.e. the excess of the limit of PLN 2,000,000.
What has changed?
Until now, an entrepreneur who paid the receivables subject to WHT could, somehow automatically, apply a reduced rate of tax resulting from a double taxation treaty. If the payment qualified for an exemption or if a treaty concluded with another country so provided, the entrepreneur could not withhold any tax at all.
Under the new rules, the entrepreneur must withhold the tax and remit it to the account of the relevant Tax Office. Non-withholding of the tax is to be an exception.
Withholding tax or… death
What should an entrepreneur who pays out amounts exceeding PLN 2,000,000 do? Well, there are several options.
An entrepreneur can:
- withhold the tax at the basic rate, i.e. at the rate of 19% or 20% (later, the tax can be refunded),
- withhold no tax (or withhold it in the amount resulting from the relevant treaty), if it submits a representation that it is in possession of all the documentation and information confirming the possibility of applying a lower tax rate.
- withhold no tax if it has received the “opinion on the application of the exemption”.
Refund of withholding tax
The tax withheld will be refunded at the request of the entrepreneur – if it was the entrepreneur who incurred the economic burden of the tax (in case of the so-called gross-up clauses) – or at the request of the foreign counterparty.
The application will have to be accompanied by a number of documents concerning the transaction, such as residency certificates, agreements and bank statements.
The refund is to be made without undue delay, however, not later than … within 6 months from the date of submission of the application.
The new rules will definitely complicate the already difficult rules for collecting withholding tax. More importantly, they will have a significant bearing on the financial situation of taxpayers who have agreed to the so-called gross-up clause in their agreements, and it is they who bear the burden of collecting the withholding tax.
The Ministry of Finance has announced that it will issue clarifications on how to apply the new withholding tax legislation. The project of this clarificaton has been publsihed in June 2019. You can read on the details here (in Polish only).