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July 7, 2021
Pursuant to the amendment to the Income Tax Acts of October 23, 2018, a new mode of withholding tax collection has been introduced. The most important change consists in: introducing for a Polish entity transferring interest, royalties, dividends and receivables for certain intangible services to a foreign entity, an obligation to collect withholding tax at the basic domestic rate (the so-called pay and refund mechanism). However, the rules are not fully applied because of successive deferments under the Ordinance of the Ministry of Finance. Acording to former announcemed of the Ministry of Finance, the new regulations were to enter into force on July 1, 2021.
However, on June 28th, 2021, the Ministry of Finance published another Ordinance, once again, postponing the introduction of the provisions. Thus, the record-breaking vacatio legis, will be extended once again, this time until December 31, 2021.
Withholding Tax is a specific form of income tax, which can be used to tax cross-border transfers arising from the country, coming from such sources as interest, license fees, dividends or selected intangible services.
The amended provisions on withholding tax are aimed at stricter taxation of transfers of funds from companies abroad within a capital group. Pursuant to the amendment to the Income Tax Acts of October 23, 2018, a new withholding tax collection mechanism (the so-called pay and refund mechanism) will be introduced. It consists in the fact that the Polish paying entity, inter alia: interest, dividends, license fees or remuneration for certain intangible services for a foreign entity with a total amount exceeding PLN 2 million (in a given fiscal year), is required to collect withholding tax on the excess amount exceeding PLN 2 million at the basic rate, e.g. 20% or 19%.
If the tax is collected by a Polish tax remitter, the foreign taxpayer will be able to apply for a tax refund to the tax authority, as long as the double taxation avoidance agreements indicate that the income earned in Poland is exempt or is entitled to tax at a lower rate. The tax remitter(domestic entity) will also be able to file an application if he has paid the tax from his own resources and has borne the economic burden of the tax. As a rule, the tax refund should be made without undue delay, but not later than within six months from the date of receipt of the refund application. The tax authority will decide on the validity of the tax refund – an explanatory procedure will be carried out to verify the validity of the tax refund. If no doubts arise, the tax authority will refund the tax without issuing a decision. Documentation enabling the determination of its legitimacy shall be attached to the application for a tax refund. At the request of the tax remitter who paid the tax from his own resources and incurred the economic burden of this tax, the tax authority issues an opinion on the application of the exemption from collection of flat-rate income tax on dividends, interest and royalties paid to a given taxpayer. The authority has 6 months from the date of receipt of the application to issue an opinion which is valid for a period of 3 years.
However, the application of WHT exemption or reduced WHT rate without the use of the a “tax refund” mechanism, is still possible, if:
a)a tax remitter provides tax authorities with a statement confirming that all conditions for applying a WHT exemption or a reduced WHT rate have been fulfilled (unfortunetly, making such a statement involves personal penal-fiscal liability and results in the risk of additional tax liability for the tax remitter);
b) an advance tax ruling is obtained from tax authorities (applicable to exemptions resulting from EU Directives, and only license fees, dividends and interest payments).
Never mind the prolonged period of legal uncertainty, it seems reasonable to postpone the entry into force of the new regulations from the measure to the beginning of the tax year. It will allow entrepreneurs to avoid numerous interpretative doubts and to prepare better for the introduction of the new mechanism.