The WHT Pay and Refund Mechanism

As of January 1, 2025, three years have passed since the implementation of the pay and refund mechanism for withholding tax (WHT) collection rules in Poland. This solution has significantly changed the requirements for both WHT tax remitters and taxpayers, making cross-border payments far more demanding.

Given that withholding tax impacts Poland’s investment potential, the report reiterates that the simpler and more predictable the regulations, the greater the likelihood of increased investment levels and proper tax compliance. KPMG’s report, "WHT pay and refund mechanism. Three years of Tax Revolution: A comprehensive Overview," comprehensively addresses the key issues and challenges related to the application of the pay and refund mechanism in Poland.

The importance of withholding tax for tax remitters and taxpayers

According to the original assumptions of the Polish Ministry of Finance, the changes introduced as part of the so-called "Polish Deal"—including the pay and refund mechanism—were to be evaluated after three years. KPMG experts conducted their own review of the successive stages of the mechanism’s implementation and summarized the challenges associated with the new regulations from the perspective of Polish tax remitters and foreign taxpayers earning income in Poland.
Since 2022, the analysis of payments made to non-residents has taken on particular importance. Unfortunately, complex and imprecise regulations, along with the lack of binding tax clarifications ensuring uniform application, do not make compliance with WHT obligations any easier.
The report highlights a number of problems, including the vague obligation of due diligence on the part of the tax remitter, changes to the definition of beneficial owner, inconsistent practices in interpreting exemption conditions, and practical difficulties related to instruments under the pay and refund mechanism that allow for WHT exemption or preference.

Despite being in force for over three years, the pay and refund mechanism remains a source of many uncertainties. The area of withholding tax continues to be challenging and, at times, full of legislative pitfalls. The Ministry of Finance has made numerous attempts to address these issues—such as the two rounds of draft WHT Explanatory Notes—which have not been finalized and as such do not provide protective power. As a result, many practical matters important to WHT tax remitters and taxpayers still require improvement or clarification.

The objective of tightening the tax system against tax evasion and tax avoidance is also understood by business. Entrepreneurs wish to operate under conditions of fair market competition and within a stable legal and business environment. However, achieving this goal requires appropriate tools that, among other things, allow for reasonable prediction of tax outcomes over a given time horizon and enable the application of legally provided tax preferences. These tools must be accessible as long as they are not used for tax avoidance or applied in breach of the law. Unfortunately, this is not always the case with WHT compliance in Poland.

In light of the three-year anniversary of the pay and refund mechanism’s implementation, KPMG's report outlines the stages of its incorporation into the Polish legal framework. It also evaluates how the mechanism has functioned and summarizes the challenges in its application—primarily from the perspective of Polish tax remitters and foreign taxpayers subject to WHT, whom KPMG in Poland supports in meeting their tax obligations.

„The evaluation of the withholding tax changes introduced as part of the so-called 'Polish Deal' is mixed. On the positive side, the transformation of the exemption opinion into a WHT clearance opinion, along with the benefits it provides, and the ability for both foreign taxpayers and tax remitters to apply for it, are commendable. However, on the downside, the verification of the status of the beneficial owner and the assessment of genuine economic activity remain highly discretionary. This discretion diminishes the certainty for tax remitters and taxpayers regarding the correct interpretation of the rules and their application to specific situations.”

Michał Niżnik

Partner, Head of International tax group and EU tax law practice

KPMG in Poland

call

„The use of the pay and refund mechanism has become an important and sustainable element of doing business across borders, particularly in companies within international groups. However, it still raises a number of issues that should be addressed by the Ministry of Finance as soon as possible.”