Applying the parent–subsidiary exemption in Poland is becoming more difficult
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Applying the parent–subsidiary exemption in Poland is becoming more difficult

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Monika Dziedzic and Łukasz Kumkowski of MDDP consider the dividend taxation exemption for payments made by Polish companies and explain the fulfilment of the beneficial ownership requirement by foreign holding companies

To apply a parent–subsidiary exemption, Polish tax authorities require that recipients of dividend payments (paid by Polish companies) remain their beneficial owners and are effectively taxed in the country of their tax residency.

Polish tax authorities – followed by (in some judgments) administrative courts (e.g., the Supreme Administrative Court in a judgment dated January 31 2023, ref. No. II FSK 1588/20) – are presently of the opinion that the application of the parent–subsidiary exemption depends on the recipient of the payment being a beneficial owner. In light of Article 4a, point 29 of the Polish Corporate Income Tax Act (the CIT Act), a beneficial owner is an entity that:

  • Receives a payment for its own benefit (including deciding on its intended use and bearing the economic risk associated with the loss of this receivable or part of it);

  • Is not an intermediary obliged to transfer all or part of the received payment to another entity; and

  • Conducts a genuine business activity (if the receivable is obtained in connection with the conducted business activity).

The requirement of being the beneficial owner, despite the lack of its explicit expression in the CIT Act provisions implementing the parent–subsidiary exemption, is raised (among others) in relation to foreign holding companies, especially when a holding company does not conduct significant operational activities; among others, if it does not conclude contracts with clients, or does not hold personnel and assets required to perform its business activities.

The Polish tax authorities also pay special attention to the factual circumstances related to the operation of a foreign holding company, such as a low amount of paid-in initial capital, low costs of running an office, lack of costs related to performing management functions, or incurring only the costs of advisory and audit services.

A surprising interpretation for taxpayers

In addition to the requirement of being the beneficial owner, the Supreme Administrative Court – in judgments dated December 19 2023, ref. No. II FSK 27/23, II FSK 28/23, and II FSK 29/23 – has recently upheld unfavourable (for taxpayers that are Polish non-residents) decisions of the Voivodeship Administrative Court in Lublin, the only court considering withholding tax cases in Poland. According to the decisions, holding companies that – applying a participation exemption on dividends resulting from their domestic regulations – exempt dividends from taxation in the country of their residence do not meet (as recipients of dividend payments) the requirement not to benefit from an exemption from income tax on all their income, regardless of the source of its achievement.

In other words, if a foreign company holding shares in a Polish company (e.g., a holding company from the Netherlands) receives a dividend from a Polish company and this dividend is exempt from taxation in that country (based on, for example, the Dutch participation exemption on dividends), withholding tax should be collected (in Poland) at the time of the dividend payment.

The above interpretation remains surprising for taxpayers, as up to now the requirement not to benefit from an exemption from income tax on all their income, regardless of its source, has been interpreted in a way such that the recipient of a dividend payment should not benefit – in its country of residence – from a subjective exemption from income tax.

Moreover, this type of (natural, not to say actual) interpretation would also seem to follow from the draft explanations on withholding tax published by the Polish Ministry of Finance on September 25 2023, in which it is indicated that in the case of dividends, the condition of effective taxation should be understood in such a way that the entity receiving the dividend should be subject to effective taxation in the EU member state. However, given the difference between the Parent–Subsidiary Directive and the Interest and Royalties Directive, this condition should only be referred to the subjective aspects.

The Polish tax authorities – claiming the lack of beneficial owner status on the part of the recipient of the dividend payment (foreign holding company) and the lack of its effective taxation in the country of residence – are of the opinion that the anti-abuse clause that is provided for in Article 22c of the CIT Act will apply in the case of these taxpayers. Based on this clause, the Polish legislator does not allow the use of the dividend exemption when, generally speaking, the functioning capital structure has been intentionally (artificially) shaped in such a way as to benefit from the Parent–Subsidiary Directive.

Final thoughts on application of the dividend exemption

In view of the unfavourable position of the Polish tax authorities and the administrative courts accompanying them, it is necessary to verify whether foreign companies – in particular, pure holding companies – with an adequate capital commitment in Polish companies and that receive dividends from these (Polish) companies are, in fact, the beneficial owners of the dividend payments received from Poland and whether they are subject to effective taxation in their countries of residence.

For that purpose, it will be of crucial importance to determine whether entities receiving dividends from Poland have the appropriate business substance to carry out real business activities and effectively tax their income in their country of residence, so as to confirm that these entities (Polish non-residents) can still apply the dividend exemption provided for in the provisions of the Polish CIT Act implementing the Parent–Subsidiary Directive.

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