On 26 July 2021, the Polish Government published a package of legislative proposals to make important amendments to various tax laws, including Polish WHT regulations. The draft law, the so-called Polish Deal (Polski Ład) targeting a comprehensive tax reform in the country, is currently undergoing its consultation process and its ultimate wording has not yet been decided.
Postponements of Polish WHT changes
As we wrote earlier, the Polish income tax laws were amended as of 1 January 2019 to change the Polish WHT collection procedures. Yet the Finance Ministry has already deferred the application of these changes on six occasions for CIT, and on five occasions for PIT, with the most recent delay lasting until 31 December 2021.
The regulations proposed in the draft law introducing the “Polish Deal” are very likely to determine the ultimate structure of the Polish WHT collection framework.
The Polish WHT collection mechanism
The draft proposes a hybrid withholding tax collection mechanism with both the “pay and refund” and the “relief at source” approaches. Which of these applies will depend on the payment type (the what test), the status of the payee as a related vs. unrelated party (the who test), and the total amount of payments made to the given taxpayer (the how much test).
Pay and refund mechanism
As part of the hybrid Polish WHT collection system, the “pay and refund” mechanism will apply to:
a) income that is passive or should be treated this way, such as:
- dividends and other corporate profit distributions;
- interest, copyrights and related rights, rights (or sale of rights) to inventions, trademarks or industrial designs, royalties for the transfer of a secret formula or production process, or for the use of (or the right to use) an industrial device, including a means of transport, or a commercial or scientific device, or for the transfer of industrial, commercial or scientific know-how;
- income which, for no valid commercial reasons, was not treated as any of the foregoing;
b) income paid to related parties, if the total amount of payments subject to Polish WHT in any way and made to the same taxpayer exceeds PLN 2 million (roughly EUR 433,000) within the withholding agent’s tax year.
Relief at source mechanism
According to the draft, the “relief at source” approach will apply to:
- income other than passive income, such as payments for professional / management services (advisory, accounting, market research, legal, advertising, management and control, data processing, staff recruitment and acquisition, guarantees and suretyships, etc.);
- passive income paid to unrelated parties;
- passive income paid to related parties, if the total amount of payments subject to Polish WHT in any way and made to the same taxpayer does not exceed PLN 2 million within the withholding agent’s tax year.
Other Polish WHT changes
The draft retains the anti-fraud due diligence rules which require the Polish withholding agent to verify if it is indeed lawful to exempt the payment, to forbear collecting the tax or apply any tax rate other than the standard one. The only change is that whether or not such due diligence is exercised must be determined by reference not only to the nature and size of the Polish agent’s business but also to intercompany relations as defined in transfer pricing regulations.
The draft law introducing the “Polish Deal” modifies the available options allowing the agent to apply WHT collection preferences, such options being:
- representation by the agent’s management, or
- an opinion on preferential treatment (this used to be an exemption opinion).
Currently, an exemption opinion may be requested by foreign taxpayers or Polish withholding agents (with the latter being allowed to do so only if they have incurred the economic burden of the tax) who enjoy WHT exemption under the PS Directive and/or IR Directive. According to the planned changes, opinions on preferential treatment may be requested by foreign taxpayers, withholding agents or entities making payments through entities operating securities accounts or omnibus accounts if the taxpayer is entitled to exemption under the PS Directive and/or IR Directive and/or if he is entitled to preferential WHT treatment under the double taxation treaty. This is undoubtedly the most important change regarding the Polish WHT scheme.
Additionally, the proposal slightly changes the definition of beneficial owner.
Apart from the changes to the Polish WHT framework, the “Polish Deal” draft introduces various relief and incentive measures to spur interest in investing in Poland (including the “Polish holding company” regime) and also makes it possible to opt for the application of VAT on financial services. If you are also interested in reading about these changes, please click here and download the latest WTS Global Financial Services Newsletter to read the full article, or contact the experts of WTS&SAJA Sp. z o.o. directly, the exclusive representative of WTS Global in Poland.