Publication date: January 14, 2025
Practical comments on beneficial owner, treaty shopping, beneficial owner clauses for dividends, beneficial owner clauses for interest, substitute companies and abusive clauses, the status of a beneficial owner in various types of intermediary centres between service orderers and service providers, withholding tax on interest paid within the cash pooling structure.
The look-through approach (also known as LTA) is an issue in international tax law concerning the problem of double taxation, also related to the issue of the so-called withholding tax. It allows for the application of preferential double taxation rates based on a double taxation treaty concluded between Poland and the country of the beneficial owner’s seat, in the scope most often concerning dividends, interest and royalties. However, only an entity with the status of a beneficial owner, is entitled to such privileges.
The concept of the beneficial owner is key concept in this respect. Under Polish law, it has a legal definition in art. 4a point 29) of the Corporate Income Tax Act of 15 February 1992 (consolidated text: Journal of Laws of 2023, item 2805, as amended; hereinafter referred to as the CIT Act). In light of this definition, the beneficial owner of the recipient of the payment is an entity that meets the following conditions:
a) receives the receivable for his/her own benefit, including deciding independently on its purpose and bearing the economic risk associated with the loss of the receivable or part of it,
b) is not an intermediary, representative, trustee or other entity obliged to transfer all or part of the receivable to another entity,
c) conducts actual business activity in the country of its registered office, if the receivables are obtained in connection with the conducted business activity, and when assessing whether the entity conducts actual business activity, the nature and scale of the activity conducted by that entity in the scope of the receivable received are taken into account.
Commentators on this provision of the Act indicate that the beneficial owner should be considered in the context of Art. 4a item 29) of the CIT Act as follows: “an entity that receives a given receivable for its own benefit, including an entity that independently decides on its purpose and bears the economic risk associated with the loss of this receivable or part thereof, not being an intermediary, representative, trustee or other entity legally or factually obliged to transfer all or part of the receivable to another person or entity”.
In short, the beneficial owner is an entity conducting business activity that receives the payment for its own benefit and is not obliged to transfer it to any other entity. Therefore, the acquisition of the beneficial owner of the recipient of the payment is definitive – he is the final recipient. Therefore, assuming that company A with its registered office in country X transfers the payment to company B with its registered office in country Y, but 100% of the shares in company B are held by company C with its registered office in country Z and the entire dividend from company B is transferred to company C, then company C should be considered the beneficial owner of the dividend and may benefit from preferential taxation conditions on this basis, while company B, which is not the beneficial owner but the administrator of the income, cannot.
It should be noted, however, that the concept of beneficial owner known under Polish law applies to the interpretation of international agreements on double taxation only in the context of tax liabilities towards Poland.
The case law indicates that the concept of an entity with beneficial owner status is intended to limit the phenomenon known as treaty shopping – the use of intermediaries in transactions based in favorable tax jurisdictions for the purpose of unauthorized use of contractual benefits based on international agreements. However, if an entity qualifies for the status of beneficial owner, it may fully legally use all the privileges granted to it by the treaty.
At the outset, it should be noted that while there is a definition of the beneficial owner in Polish law, the look-through approach is not directly regulated in domestic sources of law. However, this does not mean that there is no normative basis for this concept. Very often, the look-through approach is visible in the content of international agreements on double taxation, as well as in the case law of administrative courts and interpretations of tax authorities.
First of all, the Organisation for Economic Co-operation and Development Model Convention on Taxes on Income and on Capital (hereinafter referred to as the OECD Model Convention) should be taken as a point of reference. Its current wording was adopted by the Council of the Organisation for Economic Co-operation and Development on 21 November 2017. Article 11 paragraph 2 of the OECD Model Convention contains a model beneficial owner clause. It is worth noting here that the OECD Model Convention does not constitute a source of law in the strict sense, but its content, accompanied by commentaries, is an important instrument in the interpretation of the provisions of international law concerning double taxation and the privileged status of the beneficial owner . Furthermore, in the light of the judgment of the Supreme Administrative Court of 26 July 2022, reference number II FSK 1230/21 concerning, among others, beneficial owner status, when interpreting the BO clause in Polish law, it is necessary to refer to the OECD Model Convention, which results from the thesis:
“For a proper understanding of this concept, it is necessary to use the Commentary to the Model Convention of the Organisation for Economic Co-operation and Development (hereinafter: “OECD MC”) (…) The OECD MC is a model for the construction of double taxation treaties, and using the commentary developed therefor ensures a state in which entities that are addressees of the norms contained in these treaties will interpret them in a similar manner”.
This ruling was criticised, but it continues to shape the case law of administrative courts and, consequently, legal transactions in Poland. Moreover, as the name suggests, the OECD Model Convention contains model regulations that are often transferred to international double taxation treaties.
Going further, it is necessary to indicate specific bilateral agreements binding Poland and foreign countries, which directly provide for the application of the look-through approach or this concept has been adopted in their interpretation on the basis of the case law of administrative courts and the interpretation developed by tax authorities. The provisions of these international agreements with such content are referred to in the doctrine as beneficial owner clauses (also: BO clauses). The following paragraphs present examples of beneficial owner clauses present in international agreements binding Poland concerning interest, dividends and royalties. In the current situation, the case law concerning clauses of this type for interest is much richer, which may result from various treaty regulations on this issue. Therefore, this issue is described in more detail.
A classic example of a treaty providing for the look-through approach is the Convention between the Republic of Poland and the Swiss Confederation for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital, done in Bern on 2 September 1991 (Journal of Laws of 1993, No. 22, item 92, as amended; hereinafter referred to as the Polish-Swiss Convention). The beneficial owner clauses contained in this convention include the provisions of Article 10 sec. 2 (BO clause for dividends), Article 11 sec. 2 (BO clause for interest) and Article 12 sec. 2 (BO clause for royalties). The second of these requires a more extensive discussion. Article 11 sec. 2 of the Polish-Swiss Convention refers to the concept of “person entitled to interest”. It is on the basis of this provision that the Supreme Administrative Court in its judgment of 13 December 2013, file reference no. Act II FSK 2873/11, stated that the “person entitled to interest” under the Polish-Swiss convention is the actual, i.e. final, recipient of the payment, which was an important milestone in introducing the look-through approach concept in the practice of international tax law in Poland. The cited ruling is often cited by administrative courts in the context of applying LTA in Poland in the context of many international agreements on the avoidance of double taxation.
An analogous term for the person entitled to interest is used in Art. 11 sec. 2 of the Agreement between the Republic of Poland and the Federal Republic of Germany on the Avoidance of Double Taxation with respect to Taxes on Income and on Capital, signed in Berlin on 14 May 2003 (Journal of Laws of 2005, No. 12, item 90; hereinafter referred to as: the Polish-German Agreement) and Art. 11 sec. 2 of the Agreement between the Republic of Poland and the Republic of Austria on the Avoidance of Double Taxation with respect to Taxes on Income and on Capital, signed in Vienna on 13 January 2004 (Journal of Laws of 2005, No. 224, item 1921 as amended; hereinafter referred to as: the Polish-Austrian Agreement). The case law concerning the Polish-German Agreement confirms that under Art. 11 sec. 2 of the Polish-German Agreement, the person entitled to interest is considered to be an entity with the status of beneficial owner, and therefore the beneficial owner. These agreements also provide for the application of the look-through approach concept also for dividends and royalties, which in both of them are regulated by the provisions of Art. 10 sec. 2 and Art. 12 sec. 2, respectively.
As for Polish-American relations, the issue of double taxation is regulated by the Agreement between the Government of the Polish People’s Republic and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed in Washington on October 8, 1974 (Journal of Laws of 1976, No. 31, item 178; hereinafter: the Polish-American Agreement of 1974). The BO clauses present in the Polish-American Agreement of 1974 are provided for in Article 11, Section 2 for dividends, Article 12, Section 2 for interest, and Article 13, Section 2 for royalties. In the context of interest, the entity with the status of beneficial owner is referred to as the “interest recipient.”
It is worth bearing in mind, however, that the Polish-American agreement of 1974 signed during the Polish People’s Republic was to be replaced in the future by the Convention between the Republic of Poland and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income signed in Warsaw on 13 February 2013 (hereinafter: the Polish-American Convention of 2013). The Polish-American Convention of 2013, in the context of BO clauses, provides for regulations similar to the Polish-American Agreement of 1974, although not identical. For example, under the new convention, the beneficial owner clause for dividends present in Article 10 contains more exceptions to the general rules for the application of the look-through approach concept. In addition, the new convention contains a separate provision on the status of beneficial owner in the context of branch profits in Article 12. It is therefore worth familiarizing with the content of each of the provisions of the new convention separately. The 2013 Polish-American Convention provides for a BO clause for dividends in Article 10, for interest in Article 11, for branch profits in Article 12 and for royalties in Article 13.
Another example of a treaty providing for the look-through approach is the Convention between the Government of the Republic of Poland and the Government of the Kingdom of Sweden for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed in Stockholm on 19 November 2004 (Journal of Laws of 2006, No. 26, item 193, as amended; hereinafter referred to as the Polish-Swedish Convention). The Polish-Swedish Convention provides for BO clauses for dividends – in Art. 10 sec. 2, interest – in Art. 11 sec. 1, and royalties in Art. 12 sec. 2. As regards the issue of interest, Art. 11 sec. 1 of the Polish-Swedish Convention refers to the term “beneficial owner”. Thus, in Art. 11 sec. 1 of the Polish-Swedish Convention clearly shows the concept of the look-through approach, in the light of which an entity transferring interest to another entity under obligations between them will not be the “beneficial beneficiary” to whom the rule of the cited provision can be applied.
In turn, the Convention between the Republic of Poland and the Republic of Slovenia for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital, concluded in Ljubljana on 28 June 1996 (Journal of Laws of 1998, No. 35, item 198; hereinafter referred to as the Polish-Slovenian Convention) assumes in Article 11 sec. 2 that in order to benefit from preferential tax rates, the recipient of interest must be its owner, which clearly indicates the application of the look-through approach concept. A contrario, a recipient of interest who is not its owner cannot benefit from this privilege. An analogous solution is provided for in Article 11 sec. 2 of the Agreement between the Republic of Poland and the Republic of Estonia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital, concluded in Tallinn on 9 May 1994 (Journal of Laws of 1995, No. 77, item 388; hereinafter referred to as the Polish-Estonian Agreement). Both of these treaties, apart from the BO clause for interest, provide for analogous provisions for dividends and royalties – in Art. 10 sec. 2 and Art. 12 sec. 2 of each of them, respectively.
A similar solution is provided for in the Convention between the Government of the Republic of Poland and the Government of the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed in Seoul on 21 June 1991 (Journal of Laws of 1992, No. 28, item 126, as amended; hereinafter referred to as the Polish-South Korean Convention), in particular its Art. 11 sec. 2, which also uses the term beneficial owner. In the context of the Polish-South Korean Convention, there is a line of case law of the Voivodship Administrative Court in Gliwice, which applies the LTA to this international agreement and requires the concept of “beneficial owner” to be interpreted as an entity with the status of beneficial owner. That line of case law remains unquestioned by the Supreme Administrative Court. Furthermore, the Polish-South Korean Convention provides in Art. 10 sec. 2 and Article 12(2) BO clauses for dividends and royalties, respectively.
It is also worth referring to a very specific case in which a bilateral agreement does not contain a beneficial owner clause. For example, the Agreement between the Government of the Polish People’s Republic and the Government of the French Republic on the Prevention of Double Taxation with respect to Taxes on Income and Capital (Journal of Laws of 1977, No. 1, item 5; hereinafter referred to as the Polish-French Agreement) in Article 11 does not provide for such a clause for interest, although the provisions of the Polish-French Agreement provide for such clauses for dividends in Article 10, paragraph 2, and for royalties in Article 12, paragraph 2. Nevertheless, in the light of the judgment of the Supreme Administrative Court of 29 June 2018, file reference II FSK 1674/16, as part of the taxation of interest under this treaty, there is an obligation to determine which entity has the status of the beneficial owner.
As indicated, there are a number of countries whose tax residents can use beneficial owner clauses in the event of double taxation by the country of tax residence and Poland. These countries are subject to seemingly different regulations, the purpose of which is, however, the same for each of them – the application of the look-through approach concept, which is generally accepted in the practice of applying the law and in case law.
As for various specific cases and practical examples of the application of the look-through approach concept, they are provided by court decisions and interpretations made by tax authorities. In order to familiarize in depth with the discussed issue, it is also worth reaching for these sources.
As mentioned earlier, for the practical application of this concept, the canon of the most important judgments includes the judgment of the Supreme Administrative Court of 13 December 2013, file reference II FSK 2873/11. Based on this judgment, an entire line of case law of administrative courts was built, which sets the framework for the application of the look-through approach concept in Polish legislation.
As for the general definition of a beneficial owner in international tax law, it is worth referring to the factual justification of the previously cited judgment of the Provincial Administrative Court in Opole of 24 July 2024, file reference I SA/Op 112/24. The cited judgment clearly characterizes the attributes of the beneficial owner, the importance of BO clauses for combating the phenomenon of treaty shopping and the typical forms of unauthorized, abusive use of these provisions known in practice. There are two of them: substitutes and substitute companies. Substitutes are all kinds of intermediaries not authorized to effective exercise of the right to dispose of a given stream of income. In turn, the substitute company in the light of the judgment: “is considered a taxpayer in respect of the passive income obtained, which is attributed to it in the country of residence. Nevertheless, due to the need to combat tax avoidance, it was decided to exclude it from the scope of the term “beneficial owner”. The substitute company is subject to exclusion from the scope of the term “beneficial owner” only when it has a very narrow scope of rights in relation to the income obtained“.
Moreover, with respect to the beneficial owner clause for interest (although this principle also applies to other clauses of this type), it is worth familiarizing with the thesis expressed in the judgment of the Provincial Administrative Court of 4 February 2020, reference number I SA/Gl 1488/19: “in order to meet the condition resulting from the above provision, the owner of the interest should also be its final recipient. It is not about the “recipient of the interest” being the direct recipient, but about being the actual recipient (and not an intermediary) the owner, and therefore the “person entitled” to the interest. In other words, the last entity in the chain of “interest” transfer transactions being its owner and having its registered office in the territory of the other contracting State”.
It is also worth mentioning that the case law of the Supreme Administrative Court often refers to other conventions for the interpretation of BO clauses. In the light of the judgment of the Supreme Administrative Court of 26 July 2022, file reference II FSK 1230/21, such a convention is the OECD Model Convention (i.e. a soft law instrument in international law serving to interpret its actual norms). In turn, in the light of the judgment of the Supreme Administrative Court of 12 August 2021, file reference II FSK 126/19, such a convention is the Vienna Convention on the Law of Treaties.
As for the acts of interpretation made by tax authorities regarding general rules in this area, the Tax Explanations of 25 September 2023 regarding the collection of withholding tax issued by the Minister of Finance come to the fore, which contain a detailed discussion of the concept of the beneficial owner. In addition, there is a thesis there: “it should be assumed that the concept of “beneficial owner” applies in a given DTT regardless of whether it contains such a clause directly in relation to dividends, interest or royalties. Consequently, there is no basis for differentiating the payer’s obligations in the scope of due diligence by distinguishing DTTs containing and not containing an explicit reference to the concept of the beneficial owner” (DTT in the text of the explanations means any international agreement on the avoidance of double taxation).
Moreover, in the context of general issues, attention should be paid to the position of the Director of the National Tax Information, according to which the application of the look through approach is based on the following assumption: “if the beneficial owner of the receivable is an entity other than the one to which payments are made by Polish withholding tax payers, the provisions of the relevant agreement concluded with the country of residence of that taxpayer should be applied, and in the case where the taxpayers are Polish tax residents, the obligation to collect withholding tax under Art. 26 in connection with Art. 21 sec. 1 item 1 of the CIT Act will not apply (as a consequence, there is no justification for applying the agreement)”.
As for more specific issues, it should be noted that it is commonly accepted among Polish tax authorities that various types of intermediary centres between service orderers and service providers do not have the status of a beneficial owner, regardless of whether the relationships between service orderers and intermediary centres consist solely of mutual agreements or result from the structure of a capital group. Furthermore, an example of an entity being the beneficial owner in the context of BO clauses is a shareholder (or stockholder) to whom a dividend is paid by a company that has generated income due to a transaction made with a third party. When it comes to interest related to a loan and its payment or capitalisation, the use of the look through approach is fully justified. In turn, in the context of interest related to the cash-pooling service, the Pool Leader is entitled to benefit from the privileged status only if it can be considered the beneficial owner of the interest.
Summary
Look-through approach concept has been successfully used for over a decade in the practice of applying international tax law in Poland in relation to various tax residences. Solutions enabling the successful application of this concept are provided for by both domestic legislation and international agreements binding Poland. Over the years, a relatively coherent line of case law of administrative courts has been formed in this area, which facilitates functioning in legal transactions. Moreover, interpretations made by Polish tax authorities have clearly defined the legal framework for BO clauses in specific situations occurring in market transactions, including intermediation between ordering parties and service providers, cash-pooling or the position of shareholders at the time of dividend payment. All this testifies positively to the reception of the look-through approach concept in Poland.
Bibliography:
a) Legal acts:
Convention between the Government of the Republic of Poland and the Government of the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed in Seoul on 21 June 1991 (Journal of Laws of 1992, No. 28, item 126, as amended);
Convention between the Republic of Poland and the Republic of Slovenia for the avoidance of double taxation with respect to taxes on income and capital, concluded in Ljubljana on 28 June 1996 (Journal of Laws of 1998, No. 35, item 198).
Convention between the Republic of Poland and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital, concluded in Bern on 2 September 1991 (Journal of Laws of 1993, No. 22, item 92, as amended);
Convention between the Government of the Republic of Poland and the Government of the Kingdom of Sweden for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed in Stockholm on 19 November 2004 (Journal of Laws of 2006, No. 26, item 193, as amended);
Convention between the Republic of Poland and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed in Warsaw on 13 February 2013 (Journal of Laws of 2013, item 995);
Agreement between the Republic of Poland and the Republic of Estonia on the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital, concluded in Tallinn on 9 May 1994 (Journal of Laws of 1995, No. 77, item 388);
Agreement between the Government of the Polish People’s Republic and the Government of the French Republic on the Prevention of Double Taxation with Respect to Taxes on Income and Capital (Journal of Laws of 1977, No. 1, item 5; hereinafter referred to as);
Agreement between the Government of the Polish People’s Republic and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed in Washington on October 8, 1974 (Journal of Laws of 1976, No. 31, item 178);
Agreement between the Republic of Poland and the Federal Republic of Germany on the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital, signed in Berlin on 14 May 2003 (Journal of Laws of 2005, No. 12, item 90);
Agreement between the Republic of Poland and the Republic of Austria on the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital, signed in Vienna on 13 January 2004 (Journal of Laws of 2005, No. 224, item 1921, as amended);
The Act of 15 February 1992 on Corporate Income Tax (consolidated text: Journal of Laws of 2023, item 2805, as amended);
Act of 21 June 2013 on the ratification of the Convention between the Republic of Poland and the United States of America for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed in Warsaw on 13 February 2013 (Journal of Laws of 2013, item 995).
b) Case law and tax interpretations:
Letter dated 16/10/2019, issued by: Director of the National Tax Information, 0114-KDIP2-1.4010.354.2019.1.JC, Withholding tax on interest paid within the cash pooling structure;
Letter dated 2 December 2021, issued by: Director of the National Tax Information, 0111-KDIB1-2.4010.406.2021.4.SK, CIT settlements in connection with cash pooling;
Letter dated 16/03/2022, issued by: Director of the National Tax Information, 0111-KDIB2-1.4010.15.2022.2.BJ, Withholding tax on IT services;
Letter dated 6 July 2022, issued by: Director of the National Tax Information, 0111-KDIB1-1.4010.225.2022.4.AW;
Letter dated 7 April 2023, issued by: Director of the National Revenue Information, 0111-KDIB1-1.4010.57.2023.2.SG, Withholding tax – payer’s obligations;
Letter dated August 11, 2023, issued by: Director of the National Tax Information, 0114-KDIP2-1.4010.313.2023.2.PP, Payment or capitalization of interest on a loan and the right to apply a preferential tax rate of 5%, taking into account the look through approach;
Judgment of the Supreme Administrative Court of 13 December 2013, II FSK 2873/11, LEX No. 1530053;
Judgment of the Supreme Administrative Court of 29 June 2018, II FSK 1674/16, LEX No. 2523677;
Judgment of the Supreme Administrative Court of August 12, 2021, II FSK 126/19, ONSAiWSA 2022, No. 2, item 21;
Judgment of the Supreme Administrative Court of 26 July 2022, II FSK 1230/21, LEX No. 3417791;
Judgment of the Provincial Administrative Court in Gliwice of 4 February 2020, I SA/Gl 1488/19, LEX No. 2779869;
Judgment of the Regional Administrative Court in Gliwice of 30 January 2020, I SA/Gl 1490/19, LEX No. 2798733;
Judgment of the Provincial Administrative Court in Gliwice of 19/10/2021, I SA/Gl 885/21, LEX No. 3267196;
Judgment of the Regional Administrative Court in Łódź of 18 June 2015, I SA/Łd 550/15, LEX No. 1748218;
Judgment of the Provincial Administrative Court in Opole of 24 July 2024, I SA/Op 112/24, LEX No. 3755238.
c) Legal texts:
Brzeziński B., Lasiński-Sulecki K., Morawski W., “Look-through approach” in the context of the “beneficial owner” clause applicable to dividend taxation – sources of transformation of a dangerous anti-abusive concept into an instrument for protecting the interests of the taxpayer and payer , “Prawo Budżetowe Państw i Samorządu”, 4(10)/2022, pp. 29-53;
Kuźniacki B., Anti-abusive interpretation of the concept of beneficial owner bypassing the Vienna Convention on the basis of the Polish-Swedish double taxation treaty. Commentary to the judgment of the Supreme Administrative Court of 26 July 2022, II FSK 1230/21 , PP 2023, no. 4, pp. 45-56;
Kuźniacki B., 3.3. Lack of justification for applying the Polish definition of the concept of beneficial ownership [in:] Beneficial owner and withholding tax , Warsaw 2022;
Małecki P., Mazurkiewicz M. [in:] Małecki P., Mazurkiewicz M., CIT. Commentary. Taxes and accounting, 15th edition , Warsaw 2024, art. 4(a);
Model Tax Convention on Income and on Capital: Condensed Version 2017, OECD Publishing;
Sekita J., The beneficial owner clause in the withholding tax and its application in practice, LEX/el. 2024.