Who can apply for an opinion on exemption?

Michał SZCZECH
Tax Consultant at RSM Poland

Following withholding tax changes that have been introduced, already as of 1 July this year, Polish companies paying interest, dividend or royalties to a foreign contractor in the amount exceeding PLN 2,000,000 annually shall be obliged to withhold the withholding tax according to rates set forth either in the PIT or CIT Act.

Any withholding tax exemption on the basis of the implemented Parent-Subsidiary Directive and the Royalties-Interest Directive will be possible only in two cases.

Case 1

In the first case, the entity’s manager (e.g. all members of the Management Board of a joint-stock company) shall be obliged to submit a special statement attesting that he “does not know of any facts justifying the assumption that there are any circumstances that would preclude the application of a tax rate or an exemption or refraining from withholding the tax”. Such a statement shall be submitted each time, on the payment day at the latest; the legislator has provided for the option of submitting statements on a quarterly basis only for payments made on a regular basis.

Case 2

As the first solution is too formal, a second option is also in place, namely the opinion on exemption. The opinion would be issued by the tax authority competent for the taxation of foreigners for a period of up to 36 months. Should the opinion be refused, the applicant may appeal to the administrative court.

Unfortunately, as it is usually the case with the tax law, the devil is in the detail. The conditions for issuing the opinion have been defined in a precise way; however, there is some uncertainty about who can apply for the opinion on exemption.

In this respect, the legislator has decided to make a reference to the regulations on withholding the tax refund. Unfortunately, such a solution will make things more complicated if the withholding agent (i.e. a Polish company making payments abroad) wishes to make an application. In this case, the act stipulates that the withholding agent may apply, provided that they “paid the tax from their own funds and bore the economic burden of the tax”. This solution is very appropriate for the procedure of withholding the tax refund, but it is completely out of place when it comes to the opinion on exemption, which is issued “for the future”, as it has already been said.

Example

In July 2019, the Company will apply for an advance tax ruling concerning a payment of interest to its parent company seated in Germany and planned for December 2019. The payment is supposed to exceed the amount of PLN 2 million. In the application for an advance tax ruling, the Company will present evidence attesting that the preconditions for exemption have been met. Within a statutory deadline of 6 months, the tax authority may refuse to issue the decision on the grounds that the applicant was not authorised to apply, i.e. had not yet paid the tax at the time of submitting the application (did not incur the economic burden of the tax). As a result, the Company will be obliged to withhold the withholding tax at the rate of 20% or all members of the Company’s Management Board will have to submit a relevant declaration on pain of penal fiscal sanctions.

Unfortunately, we cannot rule out the risk that tax authorities will try to reduce the number of taxpayers who can apply for an advance tax ruling. On the other hand, the explanatory memorandum to the amendment offers no indications that this was the intention of the authors of the draft act. Thus, it seems that the tax authority should be content with the provisions of the agreement under which the withholding agent either has the right to withhold the tax or apply the gross-up mechanism and pay the withholding tax from their own funds.

Therefore, it is a good idea to verify the contents of your agreements with foreign contractors today and, if needed, add provisions that would define which of the parties shall bear the economic cost of the withholding tax.