Poland Eases Withholding Tax Rules: No More Look-Through Approach

Tax authorities have changed their stance on the look-through approach in withholding tax (WHT) for payments made to intermediaries. They now assert that the approach is unnecessary, allowing tax qualification without considering the residence of beneficial owners. The Ministry of Finance has given the green light for this practice.

The Question of the Look-Through Approach Mechanism

This matter, which resulted in a favorable tax interpretation, involved a company seeking to avoid scrutiny of financing arrangements by Polish tax authorities. An Italian company, the sole shareholder of a Polish company, took loans from foreign banks and then passed the funds to the Polish company to repay its debt. The entrepreneur asked the Director of the National Tax Information whether WHT on payments made to the foreign intermediary for financing the debt should consider the final recipient of the payments (i.e., the beneficial owner of the interest). Could the look-through approach (LTA) be applied, allowing preferential WHT rates based on the beneficial owner’s residence?

The Look-Through Approach as a Tool to “Pierce” Holding Structures

The look-through approach was introduced in Polish tax law in 2019 when the Ministry of Finance issued draft guidelines on WHT collection. This approach allows the application of preferential taxation based on a double taxation treaty (DTT) between Poland and the beneficial owner’s country, even if the payment passes through an intermediary in another country. This approach requires verifying if the beneficial owner meets the treaty conditions, independent of intermediaries. In 2020, tax interpretations confirmed the approach for royalty and dividend payments when the final recipients met treaty conditions. However, the look-through approach remains controversial. Its application requires detailed verification of transaction structures and the beneficial owner’s status, leading to disputes with tax authorities. The authorities selectively applied LTA to increase taxation, often questioning intermediary companies in jurisdictions like Cyprus, Malta, Luxembourg, and the Netherlands.

Tax Authorities’ Use of the LTA Mechanism

Polish tax authorities frequently used the LTA to scrutinize the legitimacy of holding structures, especially for WHT purposes. For example:

• May 10, 2023: The Director of National Tax Information ruled that a holding company lacked sufficient business substance (no employees or operational assets), rejecting its status as a beneficial owner (Ref. 0114-KDIP2-1.4010.291.2022.2.PP).
• June 14, 2022: An LTA was accepted for dividend payments, allowing tax exemption based on the beneficial owner’s treaty, bypassing the intermediary (Ref. 0111-KDIB2-1.4010.128.2022.2.AR).
• March 18, 2020: The LTA was accepted for interest payments, applying DTT benefits (Ref. 0114-KDIP2-1.4010.534.2019.2.JC).

In cases where holding structures appeared artificial, tax authorities rejected DTT benefits, emphasizing the need for solid documentation proving genuine business activity.

Business Model and Role of Intermediaries

In the referenced case, the Italian intermediary calculated interest based on a reference rate plus a margin. The Italian shareholder deducted a fee for intermediation, with the net amount serving as payment for capital use. The intermediary repaid the banks with funds from the Polish company. This model centralizes financing in one group entity, reducing costs compared to each subsidiary taking separate loans.

Beneficial Owner Determination

The entrepreneur argued that banks were the beneficial owners of the interest payments. The Polish company sought confirmation that it could apply LTA, using the DTT applicable to the banks rather than the Italian intermediary.

The Residency or Source Principle

The Director of National Tax Information disagreed, stating that CIT obligations arise from having a residence or income source in Poland. The entity making the payment must withhold tax on non-residents’ income, including interest. Therefore, the Italian intermediary, as the direct lender, was deemed the taxpayer, not the banks.

Did the Director Have the Right to This Interpretation?

In an August 6, 2024 interpretation (Ref. 0111-KDIB2-1.4010.217.2024.1.BJ), the Director based their stance on the September 25, 2023 draft guidelines from the Ministry of Finance. According to these guidelines, LTA is not justified under CIT or the Tax Ordinance Act. This stance differs from the 2019 guidelines, which allowed LTA in certain cases.

Implications for Entrepreneurs

The September 2023 guidelines are still a draft and not legally binding. Consequently, the Director’s reliance on them for unfavorable interpretations lacks a solid legal basis. The inconsistent case law further complicates matters, creating uncertainty for taxpayers regarding WHT on payments to foreign entities.

Future Solutions: The FASTER Directive

The upcoming FASTER Directive could streamline WHT procedures. However, it must be approved by the European Parliament and the EU Council, with implementation expected by January 1, 2030. In the meantime, companies making payments to foreign entities must exercise caution, considering legal changes and shifting tax authority positions. Since taxpayers bear financial responsibility for correct WHT compliance, it is advisable to consult a tax advisor when in doubt.

Conclusion

The Ministry of Finance’s new stance may benefit taxpayers. Previously, tax authorities used LTA against holding structures. The new interpretation offers more clarity and security for traditional EU holding structures, provided intermediaries have genuine business substance. Author: Robert Nogacki, Legal Advisor, Managing Partner, Skarbiec Law Firm Source: CEO.com.pl