Publication date: October 10, 2024
Withholding tax is one of the essential elements of the international tax system, which aims to ensure that countries have the right to tax income earned on their territory by foreign entities. In the context of increasing globalization and dynamic capital flows between national borders, the issue of identifying entities entitled to use preferential tax rates is becoming increasingly complex and important. The key concept in this discussion is the so-called “beneficial owner”, i.e. the actual owner of the income.
The concept of beneficial owner is fundamental in the context of applying double taxation treaties. These treaties often provide for reduced withholding tax rates or exemptions from withholding tax for specific categories of income, such as dividends, interest or royalties. However, in order to benefit from these preferences, the recipient of the income must meet the criterion of beneficial owner of the income. In practice, this means that it is not enough to have a formal right to receive the income; a number of other requirements must also be met.
Contemporary challenges related to determining the beneficial owner of income include, among others, complex ownership structures, the use of tax havens and dynamically changing legal regulations at the national and international level. An example is the implementation of the OECD standards on combating tax base erosion and profit shifting (BEPS), which emphasize transparency and the real economic functions of entities involved in international transactions.
What is withholding tax?
Withholding tax is a form of income tax withheld by payers with a place of residence, registered office or foreign establishment in the country where the income is generated. In Poland, this means that payers are entities with a registered office, place of residence or conducting business through a foreign establishment in Poland. This usually applies to entities earning income in Poland that are not its residents. However, in some cases, this obligation may also include residents.
Withholding tax applies to both legal entities and individuals. The taxpayer is the company receiving cross-border payments, and the payer is the entity making these payments to the taxpayer. In practice, Polish companies (residents) must withhold this tax when making payments to foreign companies they cooperate with, which are usually not residents.
The tax rates are:
Withholding tax applies to foreign transactions. For example:
In the case of individuals (PIT), the tax applies to income from sea and inland navigation, air transport, dividends, interest, royalties, liberal professions, artistic or sporting activities and pensions and annuities.
Double Taxation Avoidance Agreements (DTAs) that Poland has signed with many countries allow for the application of a lower tax rate or its complete avoidance, provided that a tax residence certificate is held and due diligence is exercised.
The latest changes to withholding tax regulations include:
Polish payers making payments to non-residents must withhold tax at source and remit it to the tax office. This applies in particular to payments exceeding PLN 2 million, where additional regulations apply.
The list of revenues subject to PIT tax includes, among others, personally performed activities, interest, copyrights, invention projects, trademarks, ornamental designs and payments for the provision of production secrets, the use of industrial, commercial, scientific equipment and know-how. The standard PIT tax rate is 20% of revenue.
Withholding tax may be reduced or not collected if there is a relevant international agreement to which Poland is a party. The condition is to obtain a certificate of residence from the non-resident, confirming their place of residence for tax purposes. International agreements may establish a lower tax rate or specify that a given income is subject to taxation only in the country of residence of the non-resident. In the absence of an international agreement, the Polish payer collects tax at a rate of 20%. If the agreement provides for a different rate, e.g. 10%, the payer applies the lower rate upon presentation of the certificate of residence.
The beneficial owner under the Polish and international legal system
Beneficial owner is a term used in the tax context to describe a natural or legal person who actually benefits from the income (receivables) and bears the related economic risk. It is a key concept in the context of tax avoidance, especially in the case of double taxation treaties (DTTs) and the application of preferential tax rates.
In accordance with art. 4a item 29 of the Polish Personal Income Tax Act of 15 February 1992 (Journal of Laws No. 21, item 86) in connection with art. 5a item 33d of the Personal Income Tax Act of 26 July 1991 (Journal of Laws No. 80, item 350), the beneficial owner meets all of the following conditions:
In the context of the international meaning of the concept of Beneficial Owner (BO), it is important to consider that the condition of receiving income for one’s own benefit and the lack of obligation to pass on this income to another entity should be considered together. These conditions exclude from the definition of BO entities that act as the administrator of income, i.e. they do not have the direct right to dispose of the income received, but only the obligation to pass it on.
It is not possible to create a comprehensive list of premises qualifying an entity as an income administrator. It is crucial to take into account both economic aspects, such as the entity’s function in the structure of the capital group, and external factors that may indicate a merely administrative role of the entity. Examples of premises include a small margin on transferred payments, no income taxation at the level of the intermediary entity, regularity of transfers of receivables and no reinvestment of funds obtained.
The administrator of the income is not considered the beneficial owner, as his right to dispose of the income is limited by the obligation to pass it on. It is worth noting that obligations may result from both formal agreements and the actual circumstances of the transaction. An example would be a situation where the intermediary entity is obliged to pass on the income based on real circumstances, even in the absence of a formal contractual provision. The CJEU decision in the case N Luxembourg 1 emphasizes that the existence of an informal dividend policy may be sufficient to recognize the obligation to pass on the income.
The analysis of the obligation to remit income requires careful consideration of the specific circumstances of the case and the obligations attached to them. For example, banks, investment schemes or pension funds may be considered beneficiaries of income if they have the right to dispose of it in accordance with certain conditions or policies.
Double Taxation Treaties (DTTs) and directives aimed at eliminating barriers to cross-border economic activity have a significant impact on shaping international tax relations. However, to ensure the reliability of these mechanisms, it is important to properly identify the beneficial owners (Beneficial Owners (BO)), who can benefit from preferential tax conditions.
According to OECD guidelines and the case law of the Court of Justice of the EU (CJEU), tax preferences should not be granted to tax structures set up solely for the purpose of avoiding taxation, rather than carrying out real economic activity. This means that entities such as “wholly owned companies” that have no actual headquarters, staff or infrastructure should not qualify for tax preferences.
The definition of genuine economic activity includes a number of criteria, such as management, cost structure, employment of employees and possession of appropriate infrastructure. The CJEU indicated that it is also important to take into account the specificity of a given economic activity and the organizational characteristics of a group of companies in order to assess whether an entity actually conducts genuine activity. In practice, each case should be carefully analyzed to determine whether entities meet the criteria of genuine BO. This verification includes not only the physical presence of the entity, but also its ability to independently make economic decisions and manage the funds obtained. The use of such an approach is intended to prevent tax abuse and ensure the fairness of tax systems.
In light of the provisions of the DTT and EU directives, such as the IR Directive (its purpose is to eliminate withholding tax on interest and royalties paid by a company of a Member State to an associated company of another Member State ) and the PS Directive (its purpose is to eliminate double taxation of dividends transferred between parent companies and subsidiaries of different Member States), there are also anti-abuse clauses that allow Member States to deny tax preferences in the case of transactions of an artificial nature or aimed at tax avoidance. Verification of the beneficial owner is a key element of this process, aimed at ensuring compliance with international tax standards and fair tax settlements.
In its judgment of 26 July 2022 (reference number II FSK 1230/21), the Polish Supreme Administrative Court noted that an entity that, despite meeting the formal criteria of a taxpayer, does not conduct actual economic activity or its activity is marginal in the context of participation in an undertaking aimed at tax avoidance cannot be considered the beneficial owner. Other important conclusions also follow from this judgment: firstly, the concept of the beneficial owner does not cover only formal agents or intermediaries, but also entities that, despite using the income, have very limited power over it; secondly, a broader understanding of entities that cannot be recognized as the beneficial owner results from the need to ensure compliance with the understanding of this concept with the subject and objectives of the OECD Model Tax Convention.
Look-through concept approach
Applying the look-through concept approach (i.e. determining by the tax authority who is the actual owner of the receivable in a situation where the entity obtaining such a receivable is not its actual owner) is not justified by the provisions of the CIT Act, the PIT Act or the provisions of the Tax Ordinance. In the light of the earlier judgment of the CJEU in case N Luxembourg 1 and after the judgment of the Supreme Administrative Court of 26 July 2022, tax authorities are not obliged to apply this concept unless strictly defined conditions are met:
Effective taxation
In order to benefit from the exemption referred to earlier, in accordance with Article 21, Section 3 or Article 22, Section 4 of the CIT Act, a company must meet several conditions. One of them is the need to tax its entire income with income tax in an EU Member State or an EEA country, regardless of where it is earned. A company cannot benefit from any tax exemptions on its entire income, regardless of its source. The condition of effective taxation means that the income cannot be covered by a subjective or objective exemption. It also cannot be reduced by hypothetical costs, and the tax withheld on this income cannot be refunded or credited towards other taxes. In the case of dividends, in order for the condition to be met, the recipient of the dividend must be effectively taxed in its Member State. However, the differences between the directive on corporate income tax and the directive on personal income tax must be taken into account.[1]
[1] Judgment of the CJEU of 8 March 2017 in the Wereldhave case, reference number C ‑448/15, paragraph 43.