Withholding Tax in Poland – The “Pay and Refund” Mechanism Explained

James Roscoe

Tel: +48 785 765 777

Withholding tax (WHT) in Poland has undergone significant changes in recent years. Since 1 January 2022, a new mechanism called “Pay and Refund” applies to certain cross-border payments. This system has major implications for foreign investors, expats, and multinational companies receiving dividends, interest, or royalties from Poland.

At first glance, WHT may seem straightforward, but the pay and refund rules introduce complexity, administrative burdens, and potential cash-flow risks. Our tax advisory firm helps international clients navigate these challenges, ensuring compliance while minimizing unnecessary costs.

 

What is Withholding Tax in Poland?

Withholding tax is a lump-sum tax deducted from certain payments made by Polish entities to non-residents.

  • The taxpayer in Poland acts as the tax collector.
  • The tax is withheld at the moment of payment.
  • The income is taxed on a gross basis – without deducting expenses.

 

Types of payments subject to WHT:

  • Dividends and other profit distributions.
  • Interest payments.
  • Royalties and license fees.
  • Certain service fees (e.g. consulting, accounting, legal, marketing, management, data processing, guarantees, HR services).

 

Standard WHT rates:

  • 19% for dividends.
  • 20% for interest, royalties, and selected services.

In many cases, these rates may be reduced under a double taxation treaty (DTT) or EU Directive – but the pay and refund system can delay the benefit.

 

What is the “Pay and Refund” Mechanism?

Since 2022, if the total payments from a Polish payer to a single recipient exceed PLN 2 million in one tax year, the payer must:

  1. Withhold WHT at the standard rate (19% or 20%) on the amount exceeding PLN 2 million, even if a tax treaty or exemption would normally apply.
  2. The recipient (or sometimes the taxpayer) must then apply for a refund to recover the overpaid tax.

 

Key Features of the Mechanism

  • Threshold: PLN 2 million per year, per recipient.
  • Scope: Applies to dividends, interest, and royalties paid to related parties.
  • Taxation of excess: Amounts above the threshold must be taxed in Poland before a refund claim.

 

How to Avoid Immediate WHT Deduction

There are two possible routes:

– Payer’s Statement (WH-OSC):

  • Submit by the management board to the Lublin Tax Office.
  • Confirms that the payer holds all required documents (e.g. certificate of tax residence, beneficial ownership tests).
  • Management declares, under penalty of criminal liability, that no circumstances exist preventing application of the exemption.
  • Valid until the end of the given tax year.

– Official “Opinion on Applying Exemption”:

  • Issued by the Polish tax authorities upon application.
  • Confirms eligibility to apply a reduced rate or exemption at source.
  • Typically valid for 36 months.
  • Unlike WH-OSC, it does not expose the management board to criminal tax liability.

 

Refund Process

If tax has been withheld:

Who can apply? The foreign taxpayer (recipient of the payment) or the Polish payer (if it bore the cost).

Required documents:

  • Certificate of tax residence.
  • Proof of payment and bank transfers.
  • Agreements/contracts underlying the payment.
  • Beneficial ownership declarations.

Refunds should be processed within 6 months, although this period may be extended if the authorities need further verification.

 

Challenges for Foreign Investors

  • Cash flow impact: Millions may be tied up while waiting for a refund.
  • Heavy documentation: Authorities often request extensive proof of beneficial ownership and substance.
  • Compliance risk: Incorrect statements may trigger penalties.
  • Uncertainty: Each refund request may be subject to scrutiny and delay.

 

Why Work With a Tax Advisor

Given the complexity of the “pay and refund” system, professional assistance is essential. We help clients by:

  • Reviewing whether WHT obligations apply to their structure.
  • Applying for opinions on exemption to avoid unnecessary withholding.
  • Advising on compliance with double taxation treaties and beneficial ownership rules.

Conclusion

The Polish pay and refund mechanism for WHT significantly changes how cross-border payments are taxed. While it introduces administrative hurdles, with the right planning and documentation, businesses can secure treaty benefits and avoid double taxation.

Contact us today to assess your withholding tax obligations in Poland and ensure your cross-border payments are optimized and compliant.