Poland: Poland introduces substance test for payments to recipients abroad
Monika Marta Dziedzic, legal and tax advisor at MDDP, evaluates Poland’s new measures concerning payments to recipients abroad subject to a certain amount of withholding tax and what criteria must be fulfilled in order for an exemption or reduction to be applied.
As stated in the April issue of ITR, payments from Poland to a foreign entity subject to withholding tax (WHT) exceeding PLN 2 million ($500,000), will be subject to a standard 19% WHT rate. Such a recipient qualifying for an exemption or reduced WHT treaty rate, or in some cases WHT remitter, can apply for a WHT refund. The threshold will apply to one recipient per year. The date of introduction of these rules was deferred to January 2020.
However, already from the beginning of 2019, in order to apply the reduced WHT rates or exemptions from WHT, Polish authorities require the remitters to prove that the recipient is a beneficial owner of most types of the received payments, including interest, royalties, dividends and, according to some interpretations, also service fees.
The Polish definition of the beneficial owner differs a lot from the OECD standard. In addition to regular factors, such as not acting as an agent, trustee or intermediary, Polish law requires that the beneficial owner runs a so-called genuine business activity as specified by Polish law. This definition, in particular, requires taking into account the following:
Whether there is an undertaking in the country of the tax residency of the recipient of payment within which the entity actually pursues operations that constitute an economic activity, including in particular whether said entity has premises, qualified personnel and equipment used in the economic activity at its disposition;
Whether the entity in question does not constitute a structure whose functioning is not based on economic reasons;
Whether the scope of activity of a given entity is commensurate with its actual premises, personnel or equipment that it has at its disposition (consequently, for example, whether the personnel of the entity in question corresponds to the character of said entity and to the scale of its activity: e.g. one person is unable to take effective managerial decisions for more than a dozen companies conducting an economic activity);
Whether the arrangements concluded are consistent with the economic reality, are economically sound and do not stand in stark contrast to the general economic interests of the entity in question;
Whether the entity independently performs its essential economic functions using its own resources, including managers who are present on the premises.
The conditions for conducting a genuine economic activity will differ for manufacture and trade companies, service providers and companies involved in what is broadly understood as financial activity, such as investment or holding operations. However, in practice, proving genuine business activity in case of special purpose organisations may be problematic. Therefore it is worthwhile checking, if holding and group function companies like shared service centres, cash pool leaders or recharge vehicles especially receiving payments from Poland meet the Polish substance test. If not, the implication is not only that WHT will have to be charged at the standard 19% or 20% rate but also that the refund will not occur so easily.
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