Departure from the look-through approach in withholding tax by the Polish tax authorities

Since May 2024 this year, the Director of the National Tax Information has issued several individual tax rulings changing the hitherto relatively uniform line of interpretation of the look-through approach (LTA) in withholding tax.

The LTA consists of disregarding the formal recipients of payments or intermediaries, attributing the tax consequences of the payment to the actual, economic recipient (beneficial owner) and determining the tax consequences by adopting this approach.

Refusal of the application of the LTA by the tax authorities

The tax authority’s refusal to apply the LTA can be found, for example, in an individual interpretation of 6 August 2024[1], which concerned interest payments on a loan granted to a Polish company by its Italian parent company. The Polish company paid the interest directly to the parent company, who was not a beneficial owner. Instead, the  the Italian banks where the parent company had previously taken out a loan in order to grant the loan to the Polish daughter company were deemed to be the beneficial owners of the interest. The parent company acted as a kind of payment intermediary.

In the rationale for the interpretation, the Director of the National Tax Information refused to apply the LTA to the applicant. He argued that only the company earning the revenue has a taxpayer status and that such status cannot be granted to the so called beneficial owner who does not receive the revenue.

According to the National Tax Information Director, the status of a taxpayer is independent of the status of the beneficial owner. In result only towards an entity with the status of a taxpayer (i.e. the formal recipient of the payment, even when it is only an intermediary) is it possible to apply the provisions on taxation of interest payments, including the provisions of the Double Taxation Avoidance Agreement (DTA). In consequence, the provisions of the Polish-Italian DTA on the taxation of interest payments cannot be applied to Italian banks (as beneficial owners of the payment). On the other hand, the application of preferential taxation under the DTA to the (formal) recipient of the payment will not be possible due to the lack of beneficial owner status.

Selective application of the draft guidelines on withholding tax (WHT)

Furthermore, the draft tax guidelines on WHT dated 25 September 2023, which, however, is not a source of binding law in Poland, was cited as the main argument of the National Tax Information Director. In the tax ruling the Director of the National Tax Information referred only to the section of the draft explanations unfavourable to the applicant, i.e..: ‘It follows from point 2.3. of the above draft that the application of the ‘look-through approach’ concept (i.e. the determination by the tax authority of who is the real owner of a receivable in a situation where the entity obtaining such receivable is not its real owner) is not justified neither in the provisions of the CIT Act nor in the provisions of the Tax Ordinance. The Ministry of Finance, citing the jurisprudence of the CJEU and the Supreme Administrative Court, stated that it can and should be considered that the tax authorities are – in principle – not obliged to apply this concept’. However, the director of the National Tax Information omitted a further section of the draft explanatory notes (also point 2.3.) indicating the possibility of applying the LTA in cases where the following conditions are jointly met:.

1. the use of an intermediary company between the country of the payer and the country of the recipient of the receivable being the beneficial owner does not result in a reduction of the withholding tax levied in the country of the payer;
2. there is an identity of payment in kind between the payer and the foreign intermediary company and the foreign beneficial owner recipient of the payment;
3. the entire structure or the payment in question is not artificial within the meaning of Article 22c of the CIT Act.

In the application for the tax ruling the applicant indicated that premises 2 and 3 are met and did not describe the fulfilment of the first premise. However, the authority did not completely refer to the prerequisites indicated in the draft guidelines, which allow the application of the LTA, and did not analyse the fulfilment or lack of fulfilment of these prerequisites in the analysed case.

The new interpretative trend also includs the individual interpretations of 9 August 2024[2], 30 July 2024[3], 29 May 2024[4], 27 May 2024[5], in which the Director of the National Tax Information denied taxpayers the possibility to apply preferences in WHT using the LTA concept.

Previous approaches to the application of the LTA

The admissibility of the application of the LTA has been confirmed in individual tax rulings and administrative court judgments in previous years. For example, the Director of the National Tax Information accepted the possibility of using the LTA concept in an individual interpretation of 25 January 2024[6], concerning a cash pooling agreement, or of 11 August 2023[7].

Also the Supreme Administrative Court (NSA) expressed a positive view on the application of the LTA in its judgment of 31 January 2023[8], in which it allowed the application of a tax preference in a situation in which “although the payment of the dividend is not made to its  beneficial owner, the look-through approach is applied. This concept allows the application of preferential taxation or tax exemption when the payment is made through an intermediary – an entity which is not the  beneficial owner, but this beneficial owner is established in the EU (EEA) and is known”.

The LTA was also envisaged in the first draft of the withholding tax guidelines of 19 June 2019, which indicated that, where the beneficial owner of the receivable is ‘another entity (which must be demonstrated or investigated), then the withholding tax will be governed by the provisions of the PSA or the national rules implementing EU directives applicable to the country of residence of that entity (look through approach)’.

Controversy over the new approach to the LTA concept

The interpretations issued by the Director of the National Tax Information since May 2024 are controversial. They overlook the economic substance of the settlement. This consists in the fact that the actual entity ultimately entitled to receive the payment is a different entity than the one that receives the payment directly from the payer which only acts as a formal intermediary in the transfer of the payment to the beneficial owner. The director of the National Tax Information in these interpretations refuses to apply the LTA. The authority’s main argument is that, based on the literal wording of the provisions, the taxpayer is still the formal recipient of the payment (intermediary) and not the beneficial owner.

The provision in Article 21(3) of the CIT Act provides for the requirement of the beneficial owner of the receivable in order to apply the exemption of, inter alia, interest from WHT. However, other provisions on WHT collection, e.g. from Article 3(2) (definition of a non-resident taxpayer) and Article 26 of the CIT Act (obligations of the withholding tax payer, including with respect to the completion of documents about the taxpayer), do not condition their applicability on the status of the beneficial owner of the payee. In our opinion, such strictly linguistic interpretation of the CIT Act is erroneous, leads to inconsistent conclusions and makes the LTA inapplicable in practice. In such a situation, auxiliary methods of interpretation, i.e. systemic and functional, should be applied. In result of systemic and functional interpretation, depending on the given case, a beneficial owner should be also deemed as a formal taxpayer based on the LTA. Indeed, the new approach presented by the interpretative authorities is inconsistent with the assumptions of the tax system.

Moreover, the Commentary to the OECD Model Tax Convention on Income and Wealth, provides for the applicability of the LTA. The Commentaries to Articles 10-11 of the Convention (on the taxation of dividends and interest) indicate that, subject to other conditions imposed in these articles and in other provisions of the Convention, a limitation on the tax levied in the source country is possible when an intermediary, such as an agent or fiduciary from a Contracting State or a third country, acts between the beneficial owner and the payer, in cases where the beneficial owner is a resident of another Contracting State.

Summary – implications for withholding tax payers and taxpayers

The changes in the position of the Minister of Finance as presented in the draft 2023 clarifications, as well as the divergence of the interpretative lines of the tax authorities regarding the application of the look-through approach, once again hit tax remitters and taxpayers of withholding tax. The purpose of double tax treaties, as well as EU Directives (PS and IR), is to avoid double taxation. With the creation of the LTA in case law and doctrine, it has become possible to supplement the application of the beneficial owner clause by granting tax preferences to an indirect recipient of a payment that meets the beneficial owner conditions. Unfortunately, with the current approach of the Polish authorities to the LTA concept, it will not be possible to apply the double tax treaty preferences to beneficial owners who are only indirect shareholders.

MDDP offers advice on WHT.

#Please visit our website >> https://www.mddp.pl/podatek-u-zrodla-wht/.

If you have any further questions regarding this issue, please contact the author.

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[1] Ref. 0111-KDIB2-1.4010.217.2024.1.BJ.

[2] Ref. 0111-KDIB2-1.4010.301.2024.1.BJ.

[3] Ref. 0114-KDIP2-1.4010.241.2024.2.MW.

[4] Ref. 0114-KDIP2-1.4010.145.2024.1.PP/MR1.

[5] Ref. 0111-KDIB2-1.4010.90.2024.2.AR.

[6] Ref. 0111-KDIB2-1.4010.456.2023.2.BJ.

[7] Ref. 0114-KDIP2-1.4010.313.2023.2.PP.

[8] Ref. II FSK 1588/20.