General tax rulings regarding withholding tax matters – breakthrough or continuation of past practice? – part II – interest

Despite the wording of  the provision on the condition of ‘being subject to tax’ sounds the same for dividends, interest and royalties, the MoF followed up its ruling on dividends by issuing an general tax  ruling on this condition for interest and royalties (DD9.8202.2.2024).

What is surprising is therefore its content

This ruling also refers to the condition that the taxpayer receiving the interest / royalties is subject to taxation on its worldwide income, regardless of the place of its generation in an EU or EEA Member State, and the condition that it is not exempt from income tax on its worldwide income in the case of interest or royalties’ payments.

Acceptance of the tax authorities’ previous practice with regard to interest

First of all, reference should be made to the premise of Article 21(3)(2) of the CIT Act, i.e. the condition that the recipient of interest or royalties must be subject to income tax in its country of residence on all its income, regardless of the source of its generation. The Ministry, as in the general ruling regarding dividends, confirmed that this condition should be understood as having tax residence in an EU or EEA member state.

Differences are noticeable in the MoF’s understanding of the premise of ‘not benefiting from exemption from income tax on its total income, regardless of the source of its income’ (Article 21. 3c CIT).

The Ministry has explicitly indicated that the circumstances that exclude the use of tax preferences on the basis of the CIT Act will be:

1. taxpayer’s use of tax exemptions – both of a specific type of income and on its worldwide income (so called ‘subject-based exemption’ [zwolnienie podmiotowe] – concerning the taxable person and ‘object-based exemption’ [zwolnienie przedmiotowe]- concerning only certain items of income) – although it has not been specified which object-based exemptions are involved, or
2. application by the taxpayer special income tax rules to income earned from interest (or royalties).

The Ministry explained that this understanding is based, inter alia, on the recitals and purpose of the IR Directive, and in particular on the thesis that interest (and royalties) paid between companies from EU or EEA states should be subject to single income taxation in an EU/EEA member state. Reference was also made to the so-called Danish judgments.

The so-called Danish CJEU judgments concerning WHT

The Ministry, referred to the so-called Danish judgments issued more than 5 years ago with regard to the specific situation of the use of transparent companies in the structure (CJEU judgment of 26.02.2019 in the joined cases C-115/16, C-118/16, C-119/16, C-299/16). In this regard, reference was made to paragraph 153 of the judgment in Case C-118/16. However, the situation in that case was specific, as the recipient of the interest was a transparent company under Danish law. However, this important circumstance was not taken into account by the MF in the issued general ruling, and thus the previous unfavorable practice of the authorities has just been sanctioned.

WHT: Due diligence of the tax remitter

In a general ruling issued on interest and royalties, the MF indicated that the taxpayer’s fulfilment of the discussed conditions should be assessed through the prism of the tax regulations in the taxpayer’s country of residence or taking into account tax decisions issued with respect to such taxpayer which grant tax preferences.

We are of the opinion that the above position of the MoF should be considered taking into account the tax remitter’s obligation to exercise due diligence. The question arises as to whether the Polish tax remitter (subsidiary) will be able to analyze and subsume the tax regulations applicable in another country.

Tax loss versus the condition of not being exempt from taxation on one’s worldwide income

Similarly to the ruling on dividends, the MF stated that incurring a tax loss, as a rule, does not affect the fulfilment of the conditions for the application of the withholding tax exemption on paid interest. However, the Ministry left the authorities the option to examine the issue of non-payment of tax as a result of incurring a loss from the point of view of the provisions of Article 22c of the CIT Act (and thus the so-called small anti-abuse clause).

Conclusins on WHT general rulings

The issued general ruling is not favorable for taxpayers and tax remitters. The interpretation presented by the MoF leads to a situation where the same wording (i.e. does not benefit from the exemption from income tax on all its income, regardless of the source of its income) used in the CIT Act in relation  to both dividends and interest / royalties will be interpreted differently. The only positive aspect from the interest ruling is the clear indication that a taxpayer loss does not exclude the fulfilment of a taxable condition.

Link to general tax ruling: https://www.gov.pl/web/finanse/interpretacja-ogolna-nr-dd9820222024-ministra-finansowz-dnia-20-listopada-2024-r-dotyczaca-stosowania-niektorych-warunkow-zwolnienia-okreslonego-w-art-21-ust-3-ustawy-o-podatku-dochodowym-od-osob-prawnych