In connection with the closing of the financial year, many companies may decide to make dividend payments from the earned profit. Before paying the planned dividends, Polish tax remitters should exercise due diligence to verify whether they will be able to apply a preference or exemption from withholding tax on such dividends, including in particular:
- a) whether the obtained opinion on the application of withholding tax preference is still valid,
- b) whether, in the light of the recent practice of the Lublin Tax Office, the conditions entitling to the application of the given preference are still met,
- c) whether the necessary documents and information confirming entitlement to a possible withholding tax preference have been completed.
Due diligence of the tax remitter
The institution of the tax remitter together with and its obligations is one of the fundamental questions in the withholding tax (WHT) area. Having fulfilled certain documentation requirements, the tax remitter may be exempt from withholding tax or may apply a lower WHT rate. In certain situations, the taxpayer has a right to apply for a refund of overpaid tax within the pay & refund mechanism (WHT refund).
When verifying the conditions for applying a tax rate other than a basic rate specified in the Polish CIT Act (i.e. 19% for dividends), exemption or conditions for not collecting tax resulting from specific regulations or double tax treaties, the tax remitter is obliged to exercise due diligence. When assessing due diligence, the nature, scale of activity conducted by the tax remitter and the tax remitter’s connections with the taxpayer are taken into account.
Due diligence of the tax remitter with respect to withholding tax means a certain standard of expectations towards the tax remitter when verifying the conditions entitling to withholding tax exemption or application of a preferential withholding tax rate.
What is important:
- the tax remitter's obligation to exercise due diligence is also applicable to the payments of receivables that do not exceed the threshold of PLN 2,000,000 in the tax remitter's tax year, as this is a general obligation related to applying preferences with respect to the particular payment, regardless of whether the WHT refund procedure is applied,
- the issue of due diligence requirements for tax remitters has still not been precisely clarified by the Ministry of Finance and is the subject of many doubts.
List of issues to be verified before paying dividends
According to the above framework for not applying the domestic 19% withholding tax on the dividends, tax remitters (Polish companies paying dividends) should pay attention to the following aspects being a key in the dividend payment process.
a) Validity of the held opinion on the application of the withholding tax preferences in the context of the period of validity
Tax remitters and taxpayers who obtained the opinion before 1 January 2022 or during 2022 should remember that it will expire on 1 January 2025 or within 36 months from its issuance, respectively.
It should be recalled that for opinions issued before 31 December 2021. (under the name ‘opinions on the application of the withholding tax exemption’), the transitional provision of the so-called Polish Deal Act provided for an extension of the period of validity until 1 January 2025.
In the case of opinions on the application of withholding tax preferences issued after 1 January 2022, according to the the general rule these opinion expire after 36 months from the date of their issuance.
Given that many taxpayers and tax remitters decided to secure the applicable withholding tax approach through an opinion on the application of withholding tax preference immediately after the introduction of the new withholding tax rules (pay & refund mechanism), which took place as of 1 January 2022, it is worth to remember the above rules limiting the validity of the opinions received.
It should also be borne in mind that, despite the 6 month deadline for the issuing an opinion on the application of withholding tax preferences under the regulations of the Polish CIT Act, in practice proceedings in this regard often last longer, and such an opinion has protective effect only on future transactions (after its issuance).
b) Validity of the held opinion on the application of withholding tax preferenes in the context of the condition of a significant change in factual circumstances
It is also worth remembering that the opinion may expire in case of a material change in factual circumstances that may affect the fulfilment of the conditions for the dividend exemption referred to in Article 22(4) of the Polish CIT Act or the conditions for the application of a double tax treaty.
The ‘significant change of circumstances’ condition is still unclear. It seems that it may cover both circumstances directly affecting the fulfilment of the material prerequisites of the particular preference (e.g. % ownership in the capital, change of the tax residence) as well as the evaluative circumstances, still created in practice by the Polish tax authorities, e.g. affecting the fulfillment the criterion of beneficial owner by the recipient of receivables.
What is important, the obligation to identify the occurrence of a ‘significant change in factual circumstances’ lies on the applicant (taxpayer or tax remitter). The tax remitter, before the dividend payment, despite having an opinion, should therefore verify whether such changes in factual circumstances have occurred and, consequently, whether the prerequisites entitling to the application of the particular preference are still met.
c) Verification of the status of dividend recipient (the issue of demonstrating the fulfillment of the beneficial ownership criterion and effective taxation)
In the case of dividends paid to related parties (e.g. a long-term owner who holds at least 10 per cent of the shares in a Polish company) with their registered office in the EU/EEA, taxpayers most often want to benefit from an exemption from withholding tax on the basis of provisions implementing the so-called Parent Subsidiary Directive (PSD).
According to the latest line of the Lublin Tax Office (handling withholding tax matters), which unfortunately is confirmed by the most recent judgments of the Supreme Administrative Court, when analyzing the issue of availability of this exemption in a given situation, the following conditions not explicitly listed in the provisions of the Polish CIT Act (i.e. despite the fact that they do not literally appear as exemption conditions listed in the CIT Act) should also be taken into account:
- possession by the recipient of dividend of the attribute of beneficial owner in accordance with the definition resulting from the Polish CIT Act (much broader than the definition accepted internationally, in particular with regard to the necessity of fulfilling the criterion of conducting real business (economic) activity),
- effective taxation of the dividend on the part of the dividend recipient.
In the authors' opinion, both of the above issues should not be relevant in the context of the wording of the provisions of the Polish CIT Act and the PSD, nevertheless, due to the recent development of judicial practice it is also recommended to analyze these aspects in order to optimally protect the tax position of both the Polish company and the foreign shareholder.
d) Verification of whether the necessary documents and information confirming the right to a possible withholding tax preference have been completed
Before making dividend payment, the tax remitter should remember to complete the necessary documentation confirming that it has verified the given preference with due diligence. For this purpose, in particular, such example documentation should be collected: a valid certificate of residence confirming the recipient's residence at the moment of payment, relevant statements required by the provisions, documentation confirming that the taxpayer meets the beneficial owner test.
In connection with the frequently changing practice of the tax authorities with regard to the requirements for withholding tax preferences, in case of material transactions (significant in terms of amount), it is worth considering supplementing the analysis with a tax advisor's opinion (the so-called defense file).
Conclusion
Dividend payment in a manner enabling the application of withholding tax exemptions or preferences granted either by the EU law (Parent-Subsidiary Directive) or by the respective double tax treaties from Polish companies is a complex, very complicated issue. In this process it is necessary to take into account the latest practice of the tax authorities and the Polish Ministry of Finance. Therefore, if any of the points discussed above applies to your situation, we invite you to contact KPMG experts to discuss further steps.
