One of the key changes to be introduced under the 2019 corporate income tax (CIT) reform in Poland is a substantial review of the withholding tax (WHT) regime, in particular the way WHT exemptions or reduced rates can be applied.
Following these changes, WHT will become obligatory for certain cross-border payments. Even when a lower rate or an exemption is available, for example under a bilateral tax treaty entered into by Poland, the WHT has to be withheld in full by the withholding agent based on Polish domestic law (at either 19 percent or 20 percent) and remitted to the relevant tax authority. The tax authority may provide a refund after it has verified the right of the non-resident taxpayer to benefit from a reduced rate or an exemption.
In principle, the changes will affect cross-border payments exceeding PLN2 million annually paid to a non-resident taxpayer. The payments that may be affected by these changes include dividends, interest, royalty fees as well as various services (such as marketing, management, advisory or guarantees).
WHT refund procedure
WHT paid to the tax authority can be recovered based on an application filed either by the non-resident taxpayer (the beneficial owner of the payment) or the remitter (in case it incurs the economic burden of such withholding – eg, by the application of the gross-up procedure). In principle, such refunds should be obtained within six months from the application date; however, an application may trigger further investigation proceedings which may cause further delays.
Alternative procedures in order to mitigate WHT
Tax remitters (ie, the withholding agents) will have the option to apply the existing regime to any payments exceeding PLN2 million by filing an additional statement (together with relevant documents) to the tax authority. Such statement and documents should confirm in particular:
- fulfilment of standard formal requirements (eg, obtaining certificate of tax residency.) and
- exercise of the due diligence, including verification of the foreign taxpayer status in its home jurisdiction (in particular, with respect to its beneficial owner status and conducting business activity in home jurisdiction – ie, revenues received from Poland should be allocated to the genuine business activity rendered in home jurisdiction).
Doing so will allow the withholding agents to apply the reduced rate or the exemption directly, but the withholding agents will be liable under the Penal Fiscal Code.
Tax remitters will also have an option to apply to the tax authorities for a pre-approved opinion (allowing for an exemption from WHT) with respect to certain categories of cross-border payments – eg, dividends or interest payments for which the implemented provisions of the EU Parent-Subsidiary Directives or EU Interest-Royalties Directives are applicable.
The planned amendments will come into force on January 1, 2019 and will very likely have a significant impact on both Polish remitters and the non-residents involved (lenders, shareholders, licensors or service providers).
The new regulation does not provide for any grandfathering clause, meaning it will be necessary for parties to such cross-border arrangements to verify their active agreements (including credit facility agreements), as some of them may contain gross-up clauses that are not in compliant with the new rules.
Based on that verification, the remitters may need to work out new procedures with respect to their withholding obligations. The new rules should be also taken into account when negotiating new agreements that will result in payments of interest, royalties or service fees from January 1, 2019.