The essence of the 'pay and refund' mechanism is to impose an obligation on tax remitters to withhold tax at the appropriate rate if the amount of interest, royalties or dividends paid to the same related entity exceeds a total of PLN 2 million in a tax year.
Two options are available not to apply the above mechanism:
- filing of appropriate statements by the Polish WHT remitter - we have described the details in previous publications; and
- obtaining advance tax ruling for preferential Polish withholding tax treatment.
The tax authority, upon a request submitted by the taxpayer or tax remitter, issues advance tax ruling for preferential Polish withholding tax treatment, i.e.:
- application of a tax rate other than the one specified in Polish tax provisions (20% for interest and royalties and 19% for dividends);
- application of an exemption; or
- lack of taxation;
if it has been demonstrated in the application that the conditions set out in Polish tax provisions are met.
The authority may refuse to issue an opinion if:
- the taxpayer does not meet the aforementioned conditions for the application of the preference;
- there are justified doubts as to the compliance with the actual state of affairs of the documentation enclosed with the application or a statement of the taxpayer that he/she is the actual owner of payments;
- there are justified assumptions that a decision based on GAAR could be issued;
- there are justified assumptions that a taxpayer, who is not a resident of Poland, does not carry out real economic activity in the country of its residency;
In the event of a change in the circumstances that may affect the fulfilment of the conditions for the use of the preferences, the applicant shall, within 14 days from the day on which it became aware or, exercising due diligence, should have become aware of the change, inform the tax authority thereof.
The opinion shall expire:
- On the expiry of 36 months from the date of its issuance;
- On the last day of the month following the month in which the aforementioned 14-day period expired, if the applicant has informed the tax authority of a material change in circumstances;
- As of the date on which the taxpayer to which the opinion relates ceased to meet the conditions for the application of the preferences set out in the CIT Act or the conditions for the application of the double taxation treaty, if the applicant has not informed the tax authority of the changes within the 14-day deadline.
The authority shall issue an opinion within 6 months, however the deadline for its issuance may be extended. The applicable administrative fee is PLN 2,000.
When deciding to make a statement or applying for advanced tax ruling, it should be borne in mind that:
- Obtaining advanced tax ruling requires the applicant to demonstrate that the conditions for the application of preferences are met - the authority, while issuing the opinion, verifies the situation in details;
- Unlike advanced tax ruling, a statement does not trigger immediate verification of its content by the tax authority (until a possible audit), thus creating a longer state of uncertainty as to whether its content is considered correct;
- The application of the statement requires the applicant to exercise ‘due diligence’ in verifying the applicability of the preference; importantly, the notion of 'due diligence' is not defined, so the risk of this being challenged by the authority cannot be excluded;
- The interpretation of some of the conditions for the application of the preference can be problematic due to the vague concepts present in withholding tax, such as 'beneficial owner', and their incosistent interpretation by tax authorities and jurisprudence;
- Statement is a relatively quick and easy solution, however, it must be submitted periodically;
- Obtaining advanced tax ruling involves paying a fee and waiting around six months for the opinion to be issued.
As a result, obtaining advance tax ruling for preferential Polish WHT treatment, especially in the case of periodical payments, may prove to be a solution that provides certainty of the correct interpretation of the legislation and avoids possible criminal and fiscal liability.
