Tax Alert: The Ministry of Finance has published another draft explanation on withholding tax ('WHT').

Clarification of the interpretation and application of the provisions of the CIT and PIT Acts.

Clarification of the interpretation and application of the provisions of the CIT and PIT.

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On 28 September 2023 the Ministry of Finance has published the long-awaited by taxpayers and announced for a long time another draft tax explanation on withholding tax ("Explanations")*. The Ministry indicates that the purpose of the Explanations is to clarify the interpretation and application of selected provisions of the Polish CIT Act and the Polish PIT Act concerning withholding tax.

First draft of the tax explanations

By way of introduction, it is worth recalling that on 1 January 2019, regulations were introduced into the Polish tax system governing the so-called pay&refund procedure, which,  subject to further modifications, effectively from 1 January 2022 introduced the obligation to withhold tax at the base rate stipulated in Polish CIT/PIT Acts after exceeding the 2 million threshold of dividend, interest and royalty payments to the same related taxpayer, with the right to a refund of all or part of the withheld tax.

On 19 June 2019, the first draft of the WHT's Tax Explanations was published, which was never finalised and only had a supporting role in the application of the new obligations.

Scope of the new draft Explanations

The new draft Explanations provides limited clarification of the withholding tax provisions, focusing primarily on the concept of beneficial owner on the grounds of the Polish CIT and PIT Acts, including the provisions implementing the Interest&Royalties Directive1, the PS Directive2 and on the grounds of double tax treaties.

The new draft Explanations, includes the following:

  • Clarification of the interpretation and application of the provisions of the CIT and PIT Acts, as in force from 1 January 2022, relating to tax remitter' withholding tax collection obligations, in particular:
    • the provisions of Article 4a(29), Article 21, Article 22 and Article 22c of the Polish CIT Act (concerning, respectively, the definition of beneficial owner, the obligation to collect withholding tax on payments of interest, royalties and dividends and the anti-abuse clause applicable to provisions implementing the withholding tax exemptions arising from the Interest & Royalties and Parent Subsidiary Directives); and
    • analogous provisions in the Polish PIT Act.
  • Provides an interpretation of the concept of beneficial owner, in particular:
    • pointing to an exemplary list of indications that an entity is an income administrator who is not the actual beneficial owner (concept of ‘income administrator’ appeared in statements by the Polish Ministry of Finance for the first time),
    • discussion of the rationale of the 'legal or actual obligation' to transfer the receivable to another entity (this condition was in the definition of beneficial owner in Article 4a(29) of the CIT Act until1 January 2022 and then has been repealed),
    • an indication of the interpretation of the condition of actual economic activity on the part of the recipient of the claim, with an indication of the exemplary circumstances to be taken into account when examining the above rationale,
    • an indication of the characteristics of the concept of beneficial owner as an anti-abuse instrument,
    • in the context of the recent practice of the Lublin Tax Office (which is the tax authority for WHT cases) of imposing a condition of effective taxation (understood as the absence of both subjective and objectivity exemption on the part of the recipient) of dividends in order to apply the WHT exemption to dividends, it seems potentially positive to see a statement in the draft Explanations pointing out the difference between the PS Directive and the IR Directive in this respect, with the conclusion that in the case of dividends "this condition should refer only to the subjective aspects". However, the way in which the Explanations are written does not make it possible to prejudge at this point whether this wording fully nullifies the previous approach of the Lublin Tax Office with regard to the requirement to prove the non-exemption of dividends in the recipient's country (which met with strong opposition from tax advisors as unjustified and unsupported by the current legislation).
  • Outlining the due diligence framework of the payer examining the beneficial owner criterion, indicating that this assessment should be carried out both when verifying the rationales of Article 21(3) of the CIT Act (the provisions implementing the Interest & Royalties Directive) and Article 22(4) of the CIT Act (implementing the Parent Subsidiary Directive), which does not contain this criterion.
  • The draft Explanations further indicates that the preferences from the DTT and the directives should not be given to entities that do not carry out actual economic activities.
  • Indicating that for the purposes of applying the reduced withholding tax rate provided for in a given double tax treaty, in the Ministry's opinion it is reasonable to apply the definition of the beneficial owner in force under the CIT Act. In the Ministry's opinion, the concept of the "beneficial owner" applies in a given double tax treaty (DTT) regardless of whether it explicitly includes such a clause with respect to dividends, interest or royalties. Consequently, there is no basis for differentiating the taxpayer's due diligence obligations through a distinction between DTTs containing and not containing an express reference to the concept of beneficial owner.
  • Indicating a limited, in relation to the current practice of tax authorities, catalogue of situations when it is possible to apply the look-through approach (according to which it is possible to apply preferential taxation resulting from a DTT concluded between Poland and the country of residence of the beneficial owner of the payment, even in a situation when the payment is made through an intermediary - an entity not being the beneficial owner, located in a country other than the beneficial owner). It seems that this may result in a departure from the previous practice of the tax authorities in this respect (which, by the way, has its origin in the previous version of the explanations on WHT).


The direction of the Explanations is controversial and raises many questions. It indicates that tax remitters will have to pay even more attention when verifying the status of the foreign payment recipient, including situations where, at first sight, the regulation in question does not require an examination of the beneficial owner criterion.

Please note that the issued Explanations are a draft to which comments can be submitted until 10 October 2023.

KPMG is conducting detailed analyses of the Explanations and will be actively involved during the consultation of this draft.

*The Explanations are issued pursuant to Article 14a (1) (2) of the Tax Ordinance Act in order to ensure uniform application of tax law provisions by tax authorities. If a taxpayer/tax remitter/tax collector follows the explanations in a given accounting period, it enjoys protection if its factual situation coincides with that described in the explanations.

Link to the Explanations:

1Directive on the common tax treatment of interest and royalty payments between associated companies of different member countries

2Directive on the common system of taxation applicable to parent companies and subsidiaries in different member countries.

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