General tax ruling regarding withholding tax matters – breakthrough or continuation of past practice? – part I – dividends

In recent days, the Ministry of Finance has published two general rulings relating to some of the conditions for the exemption from withholding tax of dividend and interest payments.

These rulings are important, but are they groundbreaking? How will the existing practice of the authorities and courts change?

In the first part, we are going to provide our thoughts on the general ruling on dividends of 15 November 2024 (No. DD9.8202.1.2024). In it, the MF provides an interpretation of the understanding of the notion of a taxpayer being ‘subject to income tax on all its income’ as one of the conditions for exemption.

Taxable or not taxable?

One of the issues at the heart of the taxpayers’ dispute with the tax authorities has been the understanding of the condition of a taxpayer being taxable in his country of residence on all its income without a possibility of exemption.

The tax authorities understood this condition as a requirement to effectively tax dividends in the taxpayer’s state of residence. This position also resulted from certain judgments of the Provincial Administrative Court in Lublin.

As a consequence of such an interpretation of the provisions, which was commonly perceived as contrary to the purpose and spirit of the PS Directive, taxpayers who, inter alia, incurred a tax loss in a given year or enjoyed exemption from taxation of dividends in the state of residence did not, in the opinion of LUS and the administrative court in Lublin, fulfil the requirement pointed in Article 22(4)(2) and thus were not entitled to apply the exemption from withholding tax.

Will the general ruling change anything?

The general ruling issued resolves in favor of the Taxpayers the doubts indicated above. As rightly pointed out, the purpose of the PS Directive was to eliminate multiple taxation of dividend distributions in a chain of capital related companies which are tax resident in EU or EEA States.

An important point raised by the general ruling is that the condition of being subject to tax on worldwide income without possibility of being exempt should be understood as a condition of being tax resident in an EU/EEA Member State.

On the other hand, exemptions on some kind of income (e.g. the participation exemption for dividends) or incurring a tax loss cannot lead to conclusions that such a foreign taxpayer benefits from a tax exemption on its worldwide income.

The Ministry has left some wiggle room here for the tax authorities, indicating that the circumstances of being subject to taxation and not being exempt from taxation may be examined and assessed through the prism of Article 22c of the CIT Act (the so-called small anti-abuse clause).

Conclusions

The tax ruling on dividend payments should be viewed favorably, particularly because the MF has made it clear that tax exemption for income from dividends received does not violate one of the exemption conditions.

However, the reservations made in the ruling may result in further questions.

It must be emphasized, however, that the general tax ruling concerns only one of the conditions the fulfilment of which entitles the tax remitter to apply the exemption from withholding tax on paid dividends. Thus, it represents a first step towards clarifying the withholding tax uncertainties.

Link to general tax ruling: https://www.gov.pl/web/finanse/interpretacja-ogolna-nr-dd9820212024-ministra-finansow-z-dnia-15-listopada-2024-r-dotyczaca-niektorych-warunkow-stosowania-zwolnienia-okreslonego-w-art-22-ust-4-ustawy-o-podatku-dochodowym-od-osob-prawnych.