Tax Alert: General ruling of the Minister of Finance on the requirement of effective taxation of dividends for withholding tax purposes

The general ruling published recently concerns one of the conditions outlined in Article 22(4) of the CIT Act providing for WHT participation exemption applicable to dividends (and other dividend-like income) paid out by the Polish entities.

The general ruling focuses on a key issue that has recently emerged in connection with the application of the WHT provisions. According to the approach adopted by the Lublin Tax Office (a specialized Polish WHT tax office) and the administrative courts, the rules envisaging WHT exemption should be interpreted as creating an obligation of an effective taxation of the dividend in the hands of the recipient in their residence country. In view of the Lublin Tax Office and the administrative courts,  lack of such effective taxation (e.g. due to locally applicable exemption)  resulted in denying the possibility to benefit from the WHT exemption in Poland (at source). . This approach has been widely criticized by the tax experts highlighting the lack of substantive reasons for applying it, and its direct incompatibility with the Parent-Subsidiary Directive.

The general ruling published recently, is the result of feedback submitted by various parties, including KPMG Poland, and the discussions conducted within the working groups focused on the WHT matters and established by Ministry of Finance last year. 

According to the Ministry of Finance, as outlined in the general ruling, the condition set forth in Article 22(4)(4) of the CIT Act concerning the obligation of "not benefiting from income tax exemption on its total income, irrespective of its source” in an EU (EEA) State indicates that to apply the dividend exemption, an entity earning the specified categories of income in Poland should be subject to worldwide income taxation in Poland or in any other EU or EEA country.

In other words, to satisfy this condition, the entity should be a tax resident of one of the countries indicated above.What is important, as indicated by the Ministry of Finance, this condition is fulfilled even if a dividend is  exempt in the hands of an EU / EEA recipient based on the tax provisions implementing the Parent-Subsidiary Directive.

Furthermore, in accordance with the general ruling, circumstances in which:

• profits are transferred in a chain of entities such that the dividend is not taxed at least once within the EU or EEA when the beneficial owner is a company established for the tax purposes outside the EU and EEA, or an entity that does not meet the definition of a company within the meaning of the Parent-Subsidiary Directive,
• the absence of taxes paid by the foreign taxpayer in a given taxable year results from their individual circumstances (e.g., utilizing tax losses or earning revenues solely from dividends),

cannot lead to the conclusion that such a foreign taxpayer benefits from a tax exemption on its worldwide income. Such circumstances may, however, be tested and assessed under Article 22c of the CIT Act (i.e., specific anti-avoidance clause in the local PSD rules). 

In KPMG Poland’s view  publication of the general ruling should be seen as a very positive development.

The general ruling should eliminate the existing doubts regarding the interpretation of the conditions for applying the participation exemption, particularly with respect to the so called “effective taxation requirement (or lack thereof).

The Ministry’s approach to the obligation of “not benefiting from income tax exemption from its total income, irrespective of its source” aligns with the expectations of taxpayers. At the same time, such approach seemed self-evident and unambiguous throughout the whole period in which participation exemption has remained in force. In fact, the Ministry simply clarifies and corrects ambiguities which arose in recent months within the practice of the Polish tax authorities and courts.

The practical implication of the general ruling is invaluable. The negative approach of the Polish tax authorities made it impossible for foreign taxpayers seated in EU / EEA jurisdictions to benefit from the WHT exemption. This is because the dividends received within the EU and EEA are not taxed, pursuant to the participation exemptions applied locally, stemming from implementation of the Parent-Subsidiary Directive.

The general ruling is not considered a source of law; however, the taxpayers and the tax remitters who apply such a ruling may benefit from its protection, similar to the protection granted by an individual tax ruling. In case of the WHT matters, where the pay & refund mechanism requires a decision issued by the tax authority (either in the procedure of issuing WHT Clearance, decision on WHT refund, as well as regarding the verification of WHT Statement), the general ruling should provide clear guidance for the tax authorities.  

We encourage you to contact KPMG Poland experts to find out how the general ruling may impact your past or planned dividend payments, as well as any on-going WHT proceedings.

The full text of the ruling (in Polish) can be found at: Interpretacja Ogólna Nr DD9.8202.1.2024 Ministra Finansów z dnia 15 listopada 2024 r. dotycząca niektórych warunków stosowania zwolnienia określonego w art. 22 ust. 4 ustawy o podatku dochodowym od osób prawnych - Ministerstwo Finansów - Portal Gov.pl

Our KPMG Team remains at your disposal for any further information you may require.