When making payments to foreign companies it is necessary to verify if the payment is subject to withholding tax (“WHT”) in Poland. If so, the Polish taxpayer must deduct the appropriate tax from the payment before transferring it abroad and pay the withheld tax to the tax office. In other words, the Polish tax should be collected before the payment is transferred outside of Poland.
The main reason for such provisions, that is collecting tax 'at the source' rather than directly from the foreign entity, is to ensure effective tax payment, as it would be more difficult for Polish tax authorities to enforce payment from companies located in other countries.
When does WHT apply?
WHT mainly applies to so-called passive income. It is applicable to payments such as:
dividends,
interest,
license fees,
remuneration for certain intangible services, such as consulting, accounting, legal, advertising, management and supervision, data processing, HR, and similar services.
If a foreign entity earns such income in Poland, it should be taxed in Poland. However, as mentioned above, it is not the foreign company that is responsible for paying the tax to the tax office, but the Polish taxpayer making the payment abroad. When making such payments, the Polish taxpayer acts as the 'tax remitter,' meaning it must withhold (deduct) the tax from the payment, report it, and remit (pay) it to the tax office.
Tax rates
If the payment is subject to WHT in Poland, the Polish tax remitter must calculate the correct tax amount based on applicable rates. Withholding tax rates vary depending on the type of income. For example, dividends are taxed at 19% WHT, while interest, license fees, and fees for intangible services are subject to a 20% rate.
The above rates are the standard rates under Polish law. However, under certain conditions, the Polish tax remitter can apply preferential WHT rules - such as reduced WHT rates or WHT exemptions - based on double taxation treaties and EU directives. For example, under the double taxation treaty between Poland and the USA, the withholding tax rate on license fees is 10%.
Verification obligations
To apply the preferential WHT taxation certain conditions must be met.
One of the requirements is obtaining a ‘certificate of residency’ from a foreign entity. This document confirms that the foreign entity is a tax resident in a given country and is eligible for treaty tax benefits. The certificate must be valid, typically issued within the last 12 months.
It is also required to exercise due diligence in verifying if the recipient qualifies for the reduced rate or exemption. The provisions do not define however what fulfilling due diligence should involve, so being compliant with these requirements can be challenging in practice.
The Ministry of Finance recommends that entities intending to apply preferential WHT rules should, among others, verify:
if the foreign entity receiving the payment is the ‘beneficial owner’ of the income – in simplified terms it means being the true owner of the income who has the right to make decisions about what to do with it, opposed to a recipient of the income that is required to pass it on to another entity (for example a related company located in a tax haven);
if they conduct genuine business activities (for example have an office and staff appropriate for the scale and type of business);
if the foreign company’s details on the agreement and invoice match those in the official commercial registers.
It should be underlined however, that there is no checklist that guarantees compliance with the due diligence requirement - each payment abroad should be analyzed individually.
If preferential WHT rates are applied incorrectly due to inadequate documentation or failure to meet due diligence requirements, the tax remitter may be liable for the unpaid WHT, as well as interest and potential penalties.
Additional requirements for higher payments
If the payment amount exceeds 2 million PLN, the Polish tax remitter is required to withhold tax at the standard Polish rates, even if preferential WHT rules would normally apply. However, this tax can later be reclaimed through the pay-and-refund mechanism.
To circumvent the pay-and-refund mechanism and apply the preferential WHT rules immediately, there are two options available, both of which require meeting additional formal requirements.
Summary
In summary, WHT is a tax deducted at the source from specific payments, including dividends, interest, royalties, and service fees. It plays a crucial role in ensuring that income earned in Poland by foreign entities is properly taxed in Poland. The Polish entity making the payment abroad is responsible for collecting and paying this tax. To do this correctly, they must carefully review the applicable Polish and international tax regulations.
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