Draft tax clarification dated September 25, 2023 on withholding tax (WHT) rules
The most significant issues addressed in the Draft Clarification concern:
1. the distinction between the actual owner and the income administrator
According to the MF, the premise of receiving receivables for one’s own benefit and the absence of an obligation to transfer the receivables to another entity should be considered together. The actual owner will not be entities that, with respect to the receivable received, act as an administrator of income (an entity whose right to dispose of income is limited by an obligation to transfer the receivable to another entity).
The draft clarification includes a list of rationales in favor of qualifying the payee as an income administrator, i.e. an entity that is not the real owner. For example, these will include the intermediary’s small margin, the intermediary’s activities based on receiving receivables and passing them on, the passing on of receivables a short time after receiving them, a multi-story opaque structure, and the payment of receivables to an entity that would not benefit from preferential taxation.
The obligation to transfer receivables does not have to arise from a formally concluded contract – it is sufficient that such an obligation exists on the basis of the facts of the case. This criterion places emphasis on examining the economic substance of the intermediary and verifying the existence of an “enforceable obligation” to transfer the receivable.
In addition, based on the Draft Explanation, the phrase beneficial owner should not be understood in a narrow, technical sense, but should have a meaning that prevents tax avoidance using PSAs or EU directives.
2. conducting so-called “real economic activity”
According to the Draft Explanatory Notes, the prerequisite for conducting real economic activity is the existence of an asset-personality substrate in the country – its absence may indicate the existence of an artificial structure, which should not benefit from the preferences under the PSA (e.g., reduced tax rate) or EU directives (exemption from withholding tax).
When assessing the actual business activity, one should take into account the specific characteristics of the business, such as the way the company is managed, its accounting balance sheet, the structure of costs and actual expenses incurred, the number of employees employed and their qualifications, and the range of premises and equipment the company has at its disposal.
In practice, the prerequisites for actual economic activity carried out by manufacturing/trade companies, service companies, and companies engaged in broad financial activities (such as investment or holding activities) will differ. However, some criteria remain universal (e.g., the criterion of the existence of a structure that functions separately from economic reasons).
In addition, the MF points out that artificiality also occurs in the case of entities engaged in limited economic activities.
3. national definition of beneficial owner in the context of double taxation treaties and EU directives
Beneficial owner should be viewed through the lens of the object and purpose of double tax treaties and directives, however, clarification of this concept is left to the discretion of individual countries.
Thus, for the purposes of applying the reduced WHT rate provided for in a given DTAA/directive, it is reasonable to apply the definition of beneficial owner applicable under the CIT Act.
4. Obligation to examine the beneficial owner requirement for dividend payments
In the case of dividend payments – as part of due diligence related to the applicability of the exemption in this regard – the Polish payer should verify the status of the beneficial owner of the recipient of such dividends.
The Draft Explanatory Notes emphasize that the requirement to examine the issue of “beneficial owner” applies in a given PSA regardless of whether it explicitly includes such a clause with respect to dividends, interest or license fees.
5. Limitations on the application of the so-called “look-through approach” concept
The draft Explanation directly indicates that the concept of the “look-through approach” is not justified either by the provisions of the CIT Act or the PIT Act, or by the provisions of the Tax Ordinance.
At the same time, it emphasizes that the role of the tax authority is not to identify the real owner of this interest, but to demonstrate that the alleged owner of the receivable (the entity to which the payment was made) is merely an intermediary company through which the abuse of the right was carried out.
According to the Ministry of Finance, the said concept can be used only in exceptional cases, when the following conditions are met together:
- the use of an intermediary company between the country of the payer and the country of the recipient of the receivable being the actual beneficiary does not result in a reduction of the withholding tax levied in the payer’s country;
- there is an identity of payment as to type between the payer and the foreign intermediary company and the foreign beneficial owner recipient of the payment;
- the entire structure or the payment in question is not artificial.
6. Effective taxation criterion
The draft also focuses on the understanding of the condition of effective taxation that enables the application of the exemption from taxation for distributions for dividends, royalties and interest resulting from Articles 21(3) and 22(4) of the CIT Law.
The requirement for effective taxation in this case should be understood in particular as the absence of an exemption of a subjective or objective nature in relation to the income (revenue) received in the recipient country.
In contrast, in the context of dividend exemption, this requirement should be referred exclusively to the subjective aspects (excluding subjective exemptions).
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Consultations for the current draft (open to all interested parties) began on Thursday, September 28, 2023 and will continue until October 10, 2023.
Accordingly, the final content of the Draft Explanatory Statement may change in the course of further work.