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

The general ruling published recently concerns one of the conditions outlined in Article 21(3) of the CIT Act, providing for WHT exemption applicable to interest and royalties paid out by the Polish entities to non-residents. In this context, it should be reminded that on 20 November 2024, the Minister of Finance issued a general ruling regarding a similar exemption condition related to the taxation of dividends. The ruling of 20 November confirmed, among other things, that the condition of not benefiting from a tax exemption on the taxpayer’s total income, regardless of its source, is not infringed even if a dividend received by an EU/EEA recipient is exempt based on the tax provisions implementing the Parent-Subsidiary Directive. Additionally, the absence of taxes paid by the foreign taxpayer in a given taxable year resulting from their individual circumstances (e.g., utilising 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.

The general ruling published on 27 November pertains to an equally important matter, i.e. the taxation of interest and royalties. According to the approach applied to such categories of receivables by certain administrative courts, the condition of “not benefiting from income tax exemption on its total income, irrespective of its source” is not met if the taxpayer “applies income tax exemption to any part of its income, regardless of its source”. Consequently, this condition applied to “all types of exemptions, including objective exemptions (i.e. exemptions applicable to certain types of income)”. At the same time, according to certain administrative courts, this condition is also not met if “the company utilises the exemptions applicable to interest to pay corporate income tax at a minimum or close to zero rate”.

According to the Ministry of Finance, as outlined in the general ruling, the condition set forth in Article 21(3c) of the CIT Act, concerning the obligation of “not benefiting from income tax exemption on its total income, irrespective of its source” indicates that the recipient of interest or royalties:

1. does not benefit from an income tax exemption on its total income, or any part thereof, nor does it benefit from an income tax exemption on any specified income category and/or
2. does not benefit from any preferential tax rules applicable to interest / royalties.

According to the Ministry of Finance, in the aforementioned case, the fulfilment of this condition should be assessed through the lens of the tax laws in force in the country of tax residence of the recipient of interest and royalties, being their beneficial owner, or through the lens of specific tax incentives granted by the tax administration of that country to such an entity (e.g., by way of an administrative decision).

Furthermore, according to the general ruling, the fact that, due to individual circumstances, the taxpayer does not pay income tax in its country of residence on the income earned in a given period (e.g., due to the utilisation of tax losses) should not, per se, indicate that the analysed condition is not satisfied.

The Ministry noted that 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), similar to the approach presented in the analysis of the WHT exemption conditions on dividends in the general ruling of 20 November.

In KPMG Poland’s view, unlike the recent general ruling on dividends, the newly published general ruling on interest and royalties does not fully consider the perspective presented by various parties and discussions conducted within the working groups focused on the WHT matters, established by the Ministry of Finance last year.

The position presented by the Ministry of Finance regarding the need to consider objective exemptions (i.e., exemptions specifically applied to interest and royalties received by taxpayers) and to consider tax preferences granted by the tax administration of that country to such an entity (e.g., by way of an administrative decision) raises certain ambiguities.

It should be emphasized that the analysed condition applies in its wording to the recipient’s “income tax exemption on its total income, irrespective of its source”. It can be argued that this wording refers to subjective exemptions only (those related to the taxpayer's worldwide income) and does not take into account objective exemptions (those related to specific types of income), which by their nature do cover the entirety of taxpayer’s worldwide income.

Nevertheless, the general ruling is likely to eliminate the existing doubts as to whether the exemption can be applied if the interest recipients, due to their individual circumstances (e.g., utilising tax loss), do not effectively pay income tax.

At the same time, it should be reminded that a 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 discussed 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 interest and royalty payments, as well as any ongoing proceedings.

The full text of the ruling (in Polish) can be found at: Interpretacja Ogólna Nr DD9.8202.2.2024 Ministra Finansów z dnia 20 listopada 2024 r. dotycząca stosowania niektórych warunków zwolnienia określonego w art. 21 ust. 3 ustawy o podatku dochodowym od osób prawnych - Ministerstwo Finansów - Portal Gov.pl

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