As of 1 July 2019, additional requirements will take effect for an exemption or preferential rate for withholding tax. The newly introduced formal requirements could mean an increase in costs of services purchased in cross-border transactions, which in turn could affect liquidity. In special cases, it might also be unclear whether measures to continue to make use of preferential tax schemes might trigger an MDR obligation (i.e. obligation to report tax planning arrangements).
1. Less scope for applying preferential tax conditions when making payments
The new overall rule regarding payments that are subject to withholding tax (such as dividends, royalties, management services fees, consultancy fees, advertising fees and legal fees etc.) will be that exemptions or preferential rates will apply after tax has been collected and paid to the competent authority at the higher statutory rates (19 or 20%). It will be possible to apply exemptions or preferential rates at the moment of payment (i.e. according to the current rules) only where:
payments made to the same customer or supplier in the year in question do not exceed PLN 2 m per year (in total), or
the party making payment makes a written statement that it has carried out a check on the requirements for applying exemptions / lower tax rates, or
the competent authority issues a ruling stating that exemptions or lower rates can be applied.
2. Conducting a check of exemption requirements
The task that taxpayers will face most frequently will be checking the requirements for applying exemptions or reduced tax rates. The law states that this check is compulsory even if payments to a single customer or supplier do not exceed PLN 2 m in the tax year.
In addition to formal requirements such as holding valid residence certificates or the legally required statements, a check also has to be performed, depending in particular on the wording of the applicable international treaty, to verify whether the payee is in fact the beneficial owner, and even the market rate of the payments. According to the regulations, the check should take account of the nature and scale of the business operations of the beneficial owner.
Where payments exceed the threshold, the check has to be certified in the form of a statement submitted by the remitter. This document has to be signed by all members of the management board (in the case of capital companies) separately for each individual recipient. The option of doing this through a proxy has been abolished. Due to the short time for which a statement submitted one time is valid, further payments to the same entity will, in general, also mean filing further statements.
3. Ruling confirming that an exemption or preferential rate can be applied
A ruling stating that more beneficial rules can be applied is issued by tax authorities at the request of a taxpayer or remitter. It is issued by the tax office proper for those entities within six months of the filing. Under the new regulations, the ruling only applies to payments of dividends, interest, and royalties. The areas for which a ruling cannot be sought mean that payments in transactions not covered by a ruling may have to be separated from payments covered by the ruling. Issuance of a ruling will entitle the holder to apply the preferential rules for 36 months, provided that there is no major change in circumstances during that time.
The authority will be able to reject an application for a ruling where the requirements for applying the exemption or preferential rate are not met, where there is reasonable doubt as to whether documentation submitted in the application or the taxpayer’s statement that they are the beneficial owner are genuine, the payment is thought to be aimed at tax avoidance, or the taxpayer is suspected of not truly conducting business activity.
4. What steps need to be taken?
Firms that make payments subject to withholding tax to non-residents will have to perform checks to verify that the grounds for applying preferential withholding tax rates are genuine. In situations of large numbers of transactions with foreign businesses, it may be advisable to conduct a due diligence to verify cross-border payments, and even introduce additional procedures.
The new rules may affect above all firms that have gross-up clauses in agreements with foreign customers and suppliers for which the extra tax levies add to the overall cost of purchasing cross-border services. It is also unclear how efficient authorities will be when reviewing applications for tax refunds.
The MDR obligation is also worth bearing in mind. Any tax optimisation procedures, which could also comprise attempts to continue the current tax rates, have to be declared, especially as one of the ways in which a scheme is defined is measures to reduce the taxable base or the applied rate.