Withholding tax 2023

Autumn has come and it has been followed by another changes in tax regulations, including the flat-rate income tax, or so-called withholding tax.

Background to the changes

The current version of the withholding tax regulations came into force on 1 January 2022. However, the fact that the legislator plans to amend the withholding tax rules became known since 2018, when the idea of introducing a limit of PLN 2 million as a cut-off amount for the application of stricter rules with regard to certain payments made to foreign entities was first announced. The main idea behind the changes was to introduce the obligation to apply the pay and refund mechanism after exceeding the above-mentioned limit of PLN 2 million of payments per year.

Ultimately, this mechanism is to be applied only from the beginning of 2022. The introduction of this obligation has enabled the tax remitters/taxpayers to use two tools, the application of which exempts them from the mandatory tax withholding and subsequently apply for its refund, i.e. to obtain an opinion on the application of the withholding tax preference or submit a statement by the tax remitter.

Tax remitter’s statement as a form of exemption from the application of the pay and refund mechanism

A tax remitter’s statement is submitted on WH-OSC form (applicable to CIT) or WH-OSP form (applicable to PIT) by the tax remitter making foreign payments. The statement indicates that all conditions for the application of the exemption or preferential (reduced) withholding tax rate have been met in respect of the counterparty concerned. Until the end of 2022, the tax remitter’s obligation to submit a tax remitter’s statement requires that the so-called initial statement be sent to the office by the 7th day of the month following the month in which the first payment was made, and a subsequent (summary) statement by the end of the second month following the month in which the initial statement was submitted, provided further payments were made to the same entity. The statement is signed by the tax remitter (individual / owner of a general partnership [spółka jawna] / member of the management board of a company) and is submitted electronically. Prior to 2022, all members of the management board had to submit the relevant statements, hence the change has greatly simplified their submission. The form is signed with a qualified electronic signature and sent via the e-Deklaracje system. Therefore, it is necessary for the signatory to have a previously submitted power of attorney on UPL-1 form – even when the signatory is the sole member of the tax remitter’s management board (in the case of one-person management board). It is still not possible to submit  the WH-OSC/WH-OSP form by proxy.

The wording of the provisions concerning the tax remitter’s statement and the very structure of the WH-OSC/WH-OSP form raise many doubts.

Interpretation doubts

Widely commented and commonly reported doubts related to the wording of the statement regulations were the reason for the decision to modify them, as in mid-2022 tax remitters began to have problems with determining whether and when to submit subsequent WH-OSC/WH-OSP forms, in the case of successive payments made in the fiscal year to the same entity. In order to apply the exemption or preferential withholding tax, the tax remitter’s originally submitted statement was effective and had to be confirmed by the tax remitter’s subsequent submission. The problem only arose when subsequent payments were made between the same entities after the submission of the tax remitter’s subsequent statement.

Doubts therefore arose as to the possibility of resubmitting the WH-OSC/WH-OSP form if more than two full months have already passed since the original statement was submitted. The wording of the legislation in force from 1 January 2022 suggested that submitting another original tax remitter’s statement was not possible. Under this interpretation, the period during which it was permissible to apply the exemption or preferential withholding tax rate on the basis of the statements submitted covered only four months per year.

Scope of modification of the provisions on the tax remitter’s statement

In response to the above ambiguities, on 30 August 2022, the Regulation of the Minister of Finance dated 29 August 2022 on the extension of certain deadlines for tax remitters to perform their obligations with regard to lump-sum income tax was published in the Journal of Laws.

The Regulation extends as of 31 August 2022, the deadlines for tax remitters to apply the original tax remitter’s statement submitted until the end of the fiscal year in which the tax remitter submitted the statement. Accordingly, tax remitters are entitled to apply the withholding tax exemption or the preferential rate thereof, respectively, on the basis of the originally (and effectively) submitted tax remitter’s statement until the end of their fiscal year (for tax remitters with a calendar fiscal year, this will be 31 December 2022), and not until the end of the second month following the month in which the statement was submitted, as was previously the case under the Tax Laws.

A short while before the appearance of the draft of the above regulation, information was made available according to which further modifications of the withholding tax regulations are also planned. These modifications are intended to appropriately clarify the existing regulations under which tax remitters submit tax remitter’s statements in order to apply preferential withholding tax rules. The changes should be assessed as positive for tax remitters.

Pursuant to the proposed wording of the new regulations, the so-called original tax remitter’s statement must be submitted no later than on the last day of the second month following the month in which the PLN 2 million limit was exceeded (Article 26 sec. 7c of the CIT Act and Article 41 sec. 17 of the PIT Act in the wording as of 1 January 2023). Subsequently, if the tax remitter makes following payments of receivables to the same counterparty after submitting the original statement, the preferential withholding tax rules (on the basis of the original statement) will be applicable by the tax remitter until the last day of the fiscal year in which the statement was submitted. On the other hand, the obligation to submit a follow-up statement arises only by the last day of the month following the end of the fiscal year (Article 26 sec. 7f and sec. 7g of the CIT Act and Article 41 sec. 20 and sec. 21 of the PIT Act in the wording as of 1 January 2023).

The new wording of the withholding tax provisions is to be applied to payments, cash, monetary values and receivables respectively made, made available or paid after 31 December 2022 (Article 20 sec. 9 of the amending act).

The above changes should be viewed positively from the perspective of the interpretation problems that have arisen in connection with the current wording of the withholding tax regulations concerning the submission of tax remitter’s statements.

Unchanged penalties for the attestation of an untruth

It has not been decided to change the sanction regulations regarding the attestation of an untruth in the tax remitter’s statement. It continues to be a fine directly linked to the annually determined value of the minimum wage. Thus, it is assumed that it may automatically increase from year to year. In 2022, the fine for making an untrue statement under the Fiscal Penal Code is up to PLN 28.9 million (in 2021, it was PLN 26.9 million).  As a rule, criminal liability for providing false data in a statement rests with the company’s management board members, so before submitting the statement, it is important to ensure that any evidence entitling the company to apply the preferential withholding tax rate or exemption has been properly collected and documented.

In addition, the inclusion of false information in the statement also entails a sanction in the form of an additional tax liability of between 10% and 30% of the tax base of the receivable to which the tax remitter has applied a lower withholding tax rate or has not withheld tax at all.

Other modifications

The amendment to the withholding tax rules also brought some clarifying changes. In the rules on the issuance of an opinion on preference application, the reference to the regulation on the application for a refund of withholding tax, previously suggesting the possibility for the tax remitter to apply for an opinion only if it bears the economic burden of the tax, has been removed. The need for a special statement by issuers of short-term bonds on the regulated market to apply withholding tax exemptions on interest paid to bondholders has also been removed. In addition, the absence of the need for the subsidiary to withhold tax on dividends paid to the Polish holding company has been sanctioned (until the end of 2022, it may have been questionable whether the tax should not first be withheld and then returned to the holding company – which was clearly contrary to the purpose of the Polish holding company regulation).

What has not been changed contrary to the demands

Although the changes should be judged positively from the perspective of tax remitters and taxpayers, one should not forget about very important areas of withholding tax that have not been changed, contrary to the clear demands of business and doctrine formulated for several years.

This primarily concerns the definition of the beneficial owner of receivables paid by Polish entities. It includes, as of 2019, the premise of the recipient’s actual economic activity in the country of establishment. This condition, commonly referred to as the requirement to hold business substance, is highly imprecise both with regard to the content of the provisions and the interpretation thereof. Moreover, within the tax administration itself, there are divergent views on this issue – a different interpretation of the provisions was presented, for example, at meetings held by the Ministry of Finance as part of public consultations, and a different one found its way into the draft tax explanations. In any case, the very fact that these explanations have been at the draft stage for three years is the best evidence that there is not yet a unified idea of how to approach the issue.

As part of the consultation on the amendment of the rules for 2023, demands were made for a comprehensive amendment of the rules with regard to the beneficial owner. However, they were treated by the government as being outside the planned framework of the amendment and promises of action on this issue were diverted to the tax clarifications. However, there are no known dates for the publication of even a preliminary new version of these clarifications, and instead there are repeated assurances of ‘work being underway’.  This means that tax remitters and taxpayers are left to their own devices with numerous uncertainties, and the only line of jurisprudence is taking shape in the framework of opinions on preference application issued (although there have been significant slowdowns in this respect too, due to the number of applications).

Future prospects

Interestingly, another legislative step on withholding tax may not come from the domestic legislator at all.  The European Commission’s Directive commonly referred to as the ATAD-3 or unShell Directive (i.e. Shell Companies Directive) is in the public consultation and amendment phase before its final referral to Parliament. Its aim is to make it compulsory for all EU member states to report on the parameters of their local business substance (once certain passive income thresholds are exceeded, cross-border disbursements are made or situations of outsourcing of business functions to unrelated entities occur). Companies whose substance is found to be insufficient will be denied the right to obtain a certificate of residence and the application of withholding tax exemptions under Community law (in respect of dividends, interest and royalties). Failure to comply with the reporting obligation is to be subject to an additional penalty of several per cent of revenue. According to the latest version of the draft Directive, the provisions would be implemented with effect from 1 January 2025, but the previous two years would already be subject to reporting.

The Directive has attracted quite strong criticism from the academic and advisory communities and is even described by some as being incompatible with double taxation treaties and other international obligations. Nevertheless, the legislation, in one form or another, is likely to eventually come into force and will represent another step in the trend towards increasing withholding tax reporting requirements and the requirements to be met by parties to cross-border transactions. With this trend in mind, it is highly unlikely that the Ministry of Finance will loosen the beneficial owner rules, as was also highlighted in its response to one of the comments made during the public consultation. One will therefore be forced to hope that the rules or clarifications will be sufficiently specified to remove the fundamental uncertainties in terms of how to understand beneficial ownership.