Generally, tax payments are made by the taxpayer, i.e., the entity with a tax liability. However, sometimes the obligation to pay tax rests with the payer, who is the entity responsible for calculating and collecting the tax from the taxpayer and remitting it to the tax authority in a timely manner. This is precisely the case with withholding tax. This is a specific institution within income tax. It applies to payments of dividends, interest, royalties, or certain intangible services to entities with tax residence outside Poland.
Generally, a Polish entity making payments under the aforementioned titles is required to withhold flat-rate income tax at a rate of 19% or 20%. However, if the total amount paid to the same entity during the tax year does not exceed PLN 2,000,000, the applicable tax rate or tax exemption under the applicable double taxation treaty may be applied. The condition for using the tax rate or exemption under the applicable double taxation treaty is obtaining a current tax residence certificate from the foreign counterparty. It is also possible to benefit from the exemption from withholding tax under the Act itself. In such a case, in addition to the applicable tax residence certificate, a number of declarations must also be obtained. These declarations must indicate that the foreign counterparty is the beneficial owner, does not benefit from an exemption from income tax on all of its income, regardless of the source of its income, and directly holds no less than 25% of the shares in the company paying the payments.
However, if the amount due exceeds PLN 2,000,000, it will not be possible to avoid tax collection under the applicable double taxation treaty, without taking into account exemptions or rates arising from specific provisions or double taxation treaties. However, it is possible to avoid tax collection if the entity paying the tax submits a declaration that:
- has the documents required by tax law to apply the tax rate or exemption or non-payment of tax resulting from specific provisions or double taxation avoidance agreements;
- after carrying out the verification referred to in paragraph 1, does not have knowledge justifying the assumption that there are circumstances excluding the possibility of applying the tax rate or exemption or non-collection of tax, resulting from special provisions or double taxation treaties - then he will be able to use the tax rate or exemption resulting from the double taxation treaty or special provisions.
Whether paying amounts up to PLN 2,000,000 or exceeding this amount, the legislator requires the payer to exercise due diligence. Due diligence should be understood as undertaking actions that any other reasonable person would undertake to assess whether the standards for applying a specific tax preference have been met. However, the precise nature of this due diligence is controversial. Generally, the payer should verify the accuracy of documents received from the payer of the withholding tax with the actual state of affairs, including actual tax residence, actual business activity, etc. This verification should be conducted using publicly available data. In the case of related entities, the verification should also include available non-public data. Furthermore, in the case of transactions involving payments for intangible services between related entities within a capital group, tax authorities require higher due diligence requirements. These may include, for example, the introduction of additional internal procedures specifying the procedures for verifying the recipients of the payments and the scope of documents or information collected.
To determine whether a withholding tax payer is eligible for the rate or exemption provided for in the applicable double taxation treaty, they may request an opinion from the tax authority regarding the application of withholding tax preferences. A fee of PLN 2,000 is required to obtain such an opinion. The tax authority issues an opinion within six months of receiving the application. The opinion serves as a guarantee of the correctness of the settlement. However, if the conditions for applying the preferences are not met, or the authority has doubts regarding the compliance of the submitted documents with the factual circumstances, or has doubts regarding the taxpayer's actual activity, or determines that the payment of the amount due may be related to tax avoidance, the tax payer will refuse to issue an opinion. If the opinion is refused, the payer may file a complaint with the administrative court.
The issue of withholding tax raises many doubts, further exacerbated by decisions of tax authorities and administrative court rulings. Although it is regulated in considerable detail in the Personal and Corporate Income Tax Act, it is essential to consult information published by the Ministry of Finance and monitor tax authorities' practices. Therefore, if you need to pay a debt subject to withholding tax, it is advisable to seek professional tax advice.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of July 18, 2023.
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