Tax Alert - Unfavorable judgment on denying tax preference opinion delivered by PAC

Provincial Administrative Court in Lublin delivered a judgment in the case I SA/Lu 100/23.

Provincial Administrative Court in Lublin delivered a judgment in the case I SA/Lu 100/23.

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On 05 April 2023, the Provincial Administrative Court in Lublin delivered a judgment in the case I SA/Lu 100/23 regarding a denial to issue the opinion on tax preferences.

Starting from 1 January 2022, payments on account of interest, royalties, and dividends exceeding PLN 2 million in the given year, made to foreign related entities are covered by the pay&refund mechanism, under which payers (paying entities) need to withhold a 19% tax on dividends or 20% tax on interest and royalties (withholding tax, WHT). In principle, collection of tax can be avoided, inter alia, based on a valid opinion on using tax preferences obtained.

Disputed matter

A complaint was filed with the administrative court as a result of denial to issue the opinion on tax preferences to dividends paid to a company based in the Netherlands. According to the tax authority, the Dutch company failed to meet the requirement set forth by Article 22(4) of the CIT Act, since in the Netherlands dividends are tax-exempt.


In the oral statement of reasons, the CJEU’s judgment in case C-448/15, dated 8 March 2017 was referred to, which, according to the Provincial Administrative Court (“PAC”), gives a raft of indications that can be applied in the material case. This is because, according to the CJEU, a company that uses preferential tax treatment in the form of 0% taxation, if it distributes its profits to its shareholders does not satisfy the condition laid down in Article 2(c) of Directive 90/435/EU. According to the PAC in Lublin, these conclusions should also apply to the case at hand, as they clearly point to the way the WHT exemptions for dividends should be understood. In the course of the proceedings, replying to the Provincial Administrative Court, the complainant admitted that in the Netherlands dividends are exempt from taxation. Moreover, the PAC confirmed that the tax authority had the right to investigate if there is effective taxation the Company. According to the Court, in order to determine whether tax exemption is possible, not only the beneficial owner status, but also the effective taxation of dividend recipient should be examined, while the fact of exempting dividends from tax in the shareholder’s country of residence automatically precludes the possibility of applying such an exemption. The Court also pointed to the judgment of the Supreme Administrative Court dated 31 January 2023 (case file I FSK 1588/20) Furthermore, the PAC in Lublinreferred to its judgments delivered  in similar cases of 28 September 2022 (case file I SA/Lu 279/22) ) and 21 September 2022 (I SA/Lu 316/22), where the court found that the taxpayer failed to meet jointly all the conditions. A similar position can be found in the judgment of PAC in Lublin dated 05 April 2023 (case file I SA/Lu 136/23).

Practical implications

This is yet another judgment dismissing a taxpayer’s complaint. Similar decisions were already delivered by PAC in Lublin in the judgments dated 28 September 2022 (case file I SA/Lu 279/22), 21 September 2022 (I SA/Lu 316/22) and 5 April 2023 (I SA/Lu 136/23).

Once again, the Court ruled that if an entity with its registered office in another country receives dividends exempt from taxation, the withholding tax should be withheld at the time of paying the dividend.

The reasoning of judgment  of PAC in Lublin dated 05 April 2023, especially this related to the condition of effective taxation of the company, raise important doubts.

Any assumption that the fact of dividends being exempt in the country of the parent company results in the inability to exempt payments of dividends in the paying country is inconsistent with the provisions and the purpose of the Directive 90/435/EU . In fact, the key objective is to prevent economic double taxation of profits in the form of dividend. Therefore, the Directive indicates that dividends should not be subject to withholding tax or taxed at the level of the parent company. From the perspective of the purpose of the Directive, it is completely sufficient to tax the profit once, at the level of the subsidiary.

The contradicting opinion presented by the PAC in Lublin results from not making a distinction between the Directive 90/435/EU and Directive 2003/49/EC (concerning the taxation of interest and royalties). The judgments on dividends have incorrectly invoked the latter, which aims only to eliminate double taxation in the legal sense, i.e., in the source country, without guaranteeing an exemption in the recipient company's country of residence.

Should the unfavorable jurisprudence of administrative courts continue, the problem can extend to other foreign investors operating under holding structures and having projects in Poland, who are paid dividends by their subsidiaries. This makes it even more important to analyze the written explanatory memorandum the judgment in question and to monitor the jurisprudence in this regard.

The issue still has not been resolved by a final decision and it is subject to ongoing analysis and monitoring by KPMG tax advisors. We will keep you updated on the progress of the matter.

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