Tax office audits haul in 650m złotys of withholding tax ‘surcharges’

Ministry of Finance data published in Dziennik Gazeta Prawna daily confirms that withholding tax (WHT) audits are being treated as a priority by the authorities. According to the article, last year, customs and tax offices carried out 202 audits of withholding tax, with surcharges totaling over 650m złotys applied on the firms audited. The average audit resulted in a surcharge of around 3.2m złotys.

Two years earlier (in 2021), the number of audits had been 86, with surcharges totaling 59m złotys,, the average audit resulting in an additional surcharge of about 684,000 złotys. In 2022, the number of audits increased to 145, and the total surcharges exceeded 385m złotys. The reason for this increase was the introduction of pay-and-refund mechanism regulations.

WHT – due diligence

Settlement of withholding tax involves broadly defined ‘due diligence’ requirements. When verifying conditions for applying the preferential (reduced) WHT rate, exemption or non-collection, the payer is obliged to exercise due diligence, which was introduced in 2019. The due diligence requirements had not been clearly set out by the legislator, resulting in frequent disputes with the tax authorities concerning this topic. Failure to perform due diligence is subject to a high degree of risk. It may result in a penalty of 10% of the gross amount of receivables paid. If the amount of receivables exceeds 15m złotys, this rate may be doubled.

When assessing due diligence, the nature and scale of the business is taken into account. The status of the so-called beneficial owner is also plays a major role.

The pay-and-refund mechanism

The pay-and-refund mechanism is another challenge that businesses dealing with withholding tax must face. In practice, this means that the payer is obliged to withhold withholding tax from the surplus amount exceeding 2m złotys at the basic rate and pay it to the account of the relevant tax office. Only in the next step can the taxpayer (or the payer – if they bear the economic burden of the tax) apply for its refund.

To apply for such a refund, the payer or taxpayer must submit appropriate applications and attachments, such as:

• Tax-residency certificate.
• Transfer confirmation relating to payments subject to withholding tax.
• Declaration by the foreign counterparty that the conditions for exemption are met.
• Evidence of the foreign counterparty’s actual economic activity to which the payments relate to – in practice, this is the most demanding element and strictly assessed by the tax authorities.

The Ministry of Finance will not relent: tax explanations project

Last autumn, the Ministry of Finance published tax explanations for provisions concerning WHT. The goal was to clarify the interpretation and application of the provisions of the Corporate Income Tax Act and the Personal Income Tax Act, in the wording applicable from 1 January 2022.

In the tax explanations project, the ministry took a rigorous approach to the criteria of the actual beneficial owner, a term defined in Article 4a point 29 of the Corporate Income Tax Act and Article 5a point 33d of the Personal Income Tax Act.

• Beneficial owner – who is it? In order to be considered a beneficial owner, an entity must fulfil all of the following conditions: receive the receivable for their own benefit, including their own decision on the use to which the receivable is to be put, and bears the economic risk of losing the receivable or part of it.
• Is not an intermediary, representative, fiduciary or other entity obliged to transfer all or part of the receivable to another entity – the draft explanatory notes make extensive reference to this requirement, indicating when the recipient is merely an ‘income administrator’ and not entitled to a preference.
• Has genuine economic activity in the country of establishment if the receivables are received in connection with an economic activity, whereby the nature and scale of the activity carried out by the entity in respect of the receivable received will be taken into account in assessing whether the entity has genuine economic activity.

In this project, reference was made to the judgment of the Court of Justice of the EU in case C-115/16, in which the court held that it is not the role of the tax authority to identify the actual owner when the true interest recipients are unknown. It can be recognised that tax authorities are not, in principle, obliged to search for the beneficial owner other than the payment recipient – identifying them is in the taxpayer’s interest, and it is up to them to demonstrate that a particular entity may be treated as such.

Look-through approach

The concept of the look-through approach (LTA) may be the last resort for groups where receivables are paid to holding entities –  both the explanatory project and practice show that they have significant difficulties in defending preferences in the area of WHT. Regarding holdings, the project indicated that for the LTA to apply:

• The holding company must transfer the receivable ‘unchanged’ (so it cannot, for example, finance a share purchase loan with dividends).
• A given double-tax treaty between Poland and the holding state must provide for a tax rate that is the same or lower than the rate between the holding state and the country of the beneficial owner.

Audits in 2024 becoming increasingly costly for taxpayers

Audits are capable of yielding results more quickly and efficiently through advanced data analysis and using knowledge gained from individual audits in other cases, made possible by centralising all proceedings regarding WHT at the Lublin tax office. As of 15 March 2024, the number of completed audits was 37*. Therefore, according to tax advisors, the trend of intensifying audits in the area of WHT may gain momentum.

Due to the requirements of due diligence and the unfavourable stance of administrative courts towards meeting the criteria for tax exemption by recipients (especially holding entities), the tax authorities have adequate tools to impose additional surcharges.

The risk can be considered particularly elevated for entities disbursing:

• Receivables to the holding company
• Interest on intra-group loans
• Dividends and other amounts due to partnerships
• Receivables to entities from tax havens

It is worth inviting a tax advisor to remain ahead of the tax inspectors – statistics show that a visit from the latter is far more costly. Should you need more details feel free to contact KR Group

*Source: Withholding tax. More and more controls and surcharges – Dziennik Gazeta Prawna daily