WHT – withholding tax on the lease of equipment abroad

Dorota WARZUCHOWSKA
Independent Accountant at RSM Poland

Entrepreneurs, when providing their services, often use specialist equipment - if they do not have their own, they decide to lease it. Sometimes leasing equipment and machines abroad is less expensive than in Poland. However, the leasing of such equipment entails additional obligations, which taxpayers are very often unaware of.

Firstly, under tax law, when a Polish entrepreneur purchases equipment rental or leasing services from foreign entities, the regulations on WHT (withholding tax) collection apply.

The concept of withholding tax

Withholding tax is a lump-sum income tax (both from legal entities as well as natural persons) collected by payers from certain income obtained on the territory of Poland by foreign entities. The entity making the payment, defined as the taxpayer, i.e. the domestic entity making the payment to a foreign entity (Art. 41 sec. 4 of the Personal Income Tax (PIT) Act and Art. 26 sec. 1 of the Corporate Income Tax (CIT) Act), is obliged to calculate, collect and pay the tax to the competent tax office. Under the Polish tax regulations, this obligation arises, as a rule, if a Polish resident pays remuneration to the foreign entity on account of the revenue earned on the territory of Poland, as defined in Art. 29 sec. of the 1 PIT Act and Art. 21 sec. 1 of the CIT Act.

Apart from the obligation to calculate, collect and pay the tax due, in such a case the taxpayer is also obliged to fulfil formal obligations - to prepare the CIT-10Z declaration (Art. 26a sec. 1 of the CIT Act) and information IFT-2/IFT-2R (Art. 26 sec. 3 of the CIT Act).

What is subject to WHT?

The following should be included as revenues subject to lump-sum income tax in Poland:

• interest,
• royalties,
• dividends,
• use or the right of use of industrial equipment, including but not limited to means of transport,
• provision of advisory, accounting, legal, advertising and publicity services
  of a similar nature.

The withholding taxpayer, i.e. a Polish company which pays the above mentioned withholding tax, is obliged to collect the withholding tax on the date of payment and the tax collected should be paid to the tax office by the seventh day of the following month.

Certificate of residence and a reduced tax rate

As I have already mentioned above, one of the revenue categories to which the CIT Act binds the obligation to pay a 20% withholding tax is, among others, fees for the use or right to use industrial or commercial equipment, including means of transport.

For the taxpayer, it becomes important to have a so-called residence certificate obtained from a foreign entity. As it results from Art. 26 sec. 1 of the CIT Act, after obtaining such a certificate, it is possible for the taxpayer to apply a reduced rate of tax resulting from the relevant convention on the avoidance of double taxation.

The application of such an agreement makes it possible to collect the tax in the amount of 5% of the gross amount of the paid dues or in the conditions specified by law – not to collect it at all.

WHT and conditional exemptions

The possibility of applying an exemption from withholding tax for revenue obtained for the use or right of use of industrial equipment results from the provision provided for in Article 21(3) of the CIT Act, if the following conditions are met jointly:

1. the payer of the receivables is:

• a company which is a taxpayer of income tax and which has its registered office or management board in the territory of the Republic of Poland, or
• a foreign establishment of a company operating in the territory of the Republic of Poland which is subject in a Member State of the European Union to income tax on its entire income, regardless of where it is earned, if the receivables paid are included in tax deductible costs when determining taxable income in the Republic of Poland,

2. the person obtaining income is a company which is subject in a Member State of the European Union other than the Republic of Poland or in another State belonging to the European Economic Area to income tax on its entire income regardless of the place where it is obtained,
3. the company paying out the receivables holds directly not less than 25% of shares in the capital of the incoming company or the incoming company must directly hold not less than 25% of shares in the capital of the company making the payment,
4. the real owner of the receivables is:

• the company referred to in point 2, or
• the foreign establishment of that company if the income derived from the collection of those claims is taxable in the Member State of the European Union in which that foreign establishment is situated.

The condition which must be met in order to be able to exempt the paid claim is also a sufficiently long holding period of the shares. According to Polish tax law, this period should last uninterruptedly for two years. However, the uninterrupted two-year period of holding the shares may lapse after the date on which the company obtains revenues.

The condition of holding the shares referred to in Art. 21.3(3)(3) of the CIT Act is also deemed to be fulfilled if both in the capital of the company paying the debt and in the capital of the company receiving revenue from, among others, licence fees, another company directly holds no less than 25% of the shares. The company must be subject to income tax in a member state of the European Union or in another state belonging to the European Economic Area on its entire income, regardless of where it is earned. This is provided for in Article 21(3a) of the CIT Act.

The possibility of applying the exemption from withholding tax on the basis of the above mentioned provisions by the company paying the dues gives rise to documentation requirements.

Taking them into account means that the company disbursing the receivables must receive the following from the company receiving the revenue:

1. a certificate of residence or a certificate of the existence of a foreign establishment,
2. a declaration that the conditions referred to in Article 21(3a) and (3c) of the CIT Act, i.e. the condition, have been fulfilled:

• that another company directly holds no less than 25% of shares in the capital of the company paying out and receiving the receivables in question, and
• the company not using the income tax exemption on its total income, regardless of the source of its income.

At the same time, the statement should indicate that the company or foreign plant is the actual owner of the receivables paid, i.e. it receives the receivable for its own benefit, is not an intermediary, representative, trustee or other entity obliged to transfer all or part of the receivable to another entity.

What is industrial equipment from the WHT perspective?

The Polish tax regulations do not define the concept of industrial equipment (furnishings). Industrial furnishings is a general term which includes all possible equipment constituting a set of technical elements.

The lack of statutory definitions and often divergent interpretations and court rulings may contribute to the fact that a Polish company paying a foreign entity from EU countries for using the equipment may have considerable difficulties in assessing its situation.

Vibratory hammer tax

To better explain the complexity of the situation, I will use a direct example. As part of its business activity, the Polish company provides leasing services of specialist equipment (devices), i.e. vibratory hammers with the necessary accessories for them. The company rents such equipment from a contractor from a Member State - the Kingdom of the Netherlands. The rent consists in the use by the lessee, i.e. the Polish company, for remuneration (rental fee) of equipment owned by the lessor - the Dutch contractor. The Polish company receives invoices from the Dutch contractor for subsequent (monthly) settlement periods. It submits payment for the rent to the Dutch counterparty on the basis of these invoices.

The Polish company leasing vibratory hammers which are used for construction work related to deep foundation work and soil reinforcement classifies them under the Type Classification of Fixed Assets to type 580 'earthmoving and foundation machines' or to type 581 'construction machines'. Thus, according to the classification, these devices are outside the group Classification of Fixed Assets 65 "industrial equipment".

It should be noted that the Polish company rents this equipment both from entities directly related to it by capital (parent company and its subsidiaries) and other independent entities.

The question therefore arises: are payments for the rent of equipment (vibratory hammer) made to the contractor from the Kingdom of the Netherlands subject to withholding tax under Article 21(1) of the tax treaty, having regard to Article 12(1) of the Convention on the Avoidance of Double Taxation Between the Republic of Poland and the Kingdom of the Netherlands?

Most certainly yes. It remains to be determined whether a Polish company has the possibility to apply a reduced rate of withholding tax or to obtain a full exemption from collecting this tax.

After a thorough analysis of the case in question, on the basis of the tax regulations and the provisions of the Convention on the Avoidance of Double Taxation Between the Republic of Poland and the Kingdom of the Netherlands, it may be considered that a Polish company has the possibility to apply a reduced withholding tax rate of 5% of the gross amount of the receivables paid for the use of vibratory hammers from foreign entities, i.e. from unrelated entities.

At the same time, the Polish company, having a valid certificate of residence and having fulfilled the requirements provided for in the aforementioned articles of the Income Tax Act, has the right to apply the statutory exemption from withholding tax on income received by a foreign entity (related to the Polish company) on the territory of the Republic of Poland.

The further one goes, the more doubts arise

To sum up, for a Polish company conducting business activity consisting, among others, in leasing specialist machinery from foreign entities, it becomes important to determine whether an additional obligation to collect withholding tax may arise as a result. Due to the fact that the notion of industrial equipment has not been defined explicitly and exhaustively in the regulations, Polish companies quite often do not realize that such an obligation applies to them at all. For the sake of safety, it is better to assume that the notion of industrial equipment is a broad concept and therefore should not be limited to equipment used in production processes. Also the divergent classification of such fixed assets causes difficulties in assessing the situation. In the case of doubt, therefore, the case law and the relevant interpretations should be examined and individual interpretations can be requested from the courts.

Therefore, if you need assistance in determining whether there is an obligation to calculate, collect and pay withholding tax for your business, please contact us: [email protected].