Changes in tax on income tax of dividends paid by a Polish company to a foreign company established within the European Union – interpretation doubts

To the end 2018 in the Income Tax Act, the principle was to use the tax preferences concerning dividends paid by the Polish company to a foreign company as soon as the payment was made. The payer could benefit from a tax exemption or from more favourable tax conditions under the contract. The check on the correct payment was carried out after the payment of the benefit. The provisions did not introduce additional conditions. However, these regulations have changed from 1 January 2019.

Introduction – legal status to 31 December 2018

Revenues from dividends received from entities established or managed in the territory of the Republic of Poland were taxed at 19% revenue generated (income). Such revenues were subject to taxation if:

• • did not benefit from the exemption under the Act 15 February 1992 on corporate income tax[1] (Next: the Corporate Income Tax Act).
• • did not benefit from a tax exemption or lower tax rate under double taxation agreements concluded by the Republic of Poland[2] .

The legislature provided for the possibility of applying the tax exemption, the so-called ‘at source tax’, of dividends paid by the Polish company to a foreign company, provided that:

• 1) paying dividend is a company established or managed in the territory of the Republic of Poland;
• 2) obtaining income from dividends is a company with a residence in Poland, the European Union or other European Economic Area,
• 3) the recipient company has directly no less than 10% shares in the capital of the company paying the dividend (for companies from the Swiss Confederation this share was higher and was 25%),
• 4) the recipient company does not benefit from an exemption from income tax on its total income, regardless of the source of the tax.[3] .

The beneficiary company had to hold a fixed share for a minimum period of time two years.

This condition was considered to have been fulfilled even if the period expired only after the date of payment of the benefit[4] . In order to benefit from the exemption, the company paying the dividend had to hold the tax residence certificate of the recipient of the dividend (foreign company)[5] .

In addition, the tax exemption applied provided that the beneficiary received a dividend in writing that the foreign company does not benefit from the exemption from income tax on its total income, regardless of the source of their achievement.[6] .

In addition, the Corporate Income Tax Act it also points out that, in terms of the benefit of the exemption, ownership must result from ownership and that the exemption applies with regard to double taxation agreements to which the Republic of Poland is party.

Amendments from 1 January 2019

The newly introduced amendments are to impose a tax collection obligation on the payer, combined with a tax refund procedure.

Recovery will only take place after proper verification of the right to preferential taxation of dividends with income tax (as opposed to previously, i.e. the dividend tax exemption was in force without prior verification). The amendment means that the mechanism for granting tax preferences only after prior verification of the rights of recipients of the claim (refund on request), i.e. First, the tax will be collected and subsequently refunded.

This procedure was dependent on the amount of the benefit paid in the tax year for one taxpayer. The limit in this respect is the amount 2,000,000 PLN.

This means that where the amount of dividend receivable paid in a given tax year does not exceed 2,000,000 PLN to the same taxpayer, the company paying the benefit may continue to apply the statutory tax exemption, on a previous basis.

At the same time, the legislator indicates that the payer should exercise due diligence when verifying the existence of conditions which are necessary for the application of the exemption.

The tax authority, when examining the due diligence of the payer, will take into account in particular the nature and scale of the activity carried out by the payer. This means that the company will have to prove that it has examined whether all statutory conditions for the application of the exemption have been fulfilled at the date of payment of the dividend.

Where the amount of dividend paid (calculated together with other benefits in question) under Article 26 the Corporate Income Tax Act – in particular interest, royalties, remuneration for intangible services) exceeds in the tax year in total 2,000,000 PLN to one taxpayer, the payer, paying the benefit, from the surplus above 2,000,000 PLN must collect the tax in any case without the possibility of not collecting the tax on the basis of an appropriate double taxation agreement, and without taking into account exemptions or rates resulting from specific provisions or double taxation agreements[7] .

The following exceptions are provided for:

• • in the event of having a positive ruling by the tax authority in force on the application of the exemption, or
• • where the manager of the dividend paying unit makes a statement of the relevant content[8] .

The statement shall indicate that the company paying the dividend:

1. has the documents required by tax law to apply the rate of tax or exemption or non-collection resulting from specific provisions or double taxation agreements;
2. After verification, it is not aware that there are circumstances that exclude the application of the rate of tax or exemption or non-collection resulting from specific provisions or double taxation agreements, in particular that it has no knowledge of the existence of circumstances preventing the fulfilment of the conditions in question under Article 28b(4)(4-6) the Corporate Income Tax Act

An opinion on the application of the exemption shall be issued by the tax authority at the request of the taxable person or payer, provided that he indicates that the conditions for exemption laid down in the Act are fulfilled. The fee on the application shall be 2,000 PLN.

The Authority may refuse to deliver an opinion in the case of:

• 1) failure by the taxable person to meet the conditions laid down under Article 22(4-6) the Corporate Income Tax Act (e.g. the condition that the recipient company has a dividend directly no less than 10% shares, continuously at least by two years);
• 2) the existence of reasonable doubts as to the actual compliance with the documentation attached to the application or the taxpayer’s declaration that he is the beneficial owner;
• 3) the existence of a reasonable presumption of a decision circumventing the law, of measures limiting the contractual advantage, or Article 22c the Corporate Income Tax Act;
• 4) the existence of a reasonable presumption that a foreign company does not carry out actual business activity in its country of establishment.

An application shall be lodged before the administrative court to refuse an opinion. The Authority shall deliver an opinion within a time limit 6 months after the date of receipt of the application. The opinion shall in principle be valid by 36 months, unless the facts concerning the taxable person have changed, authorising the payer to apply the exemption[9] .

When paying dividends to a foreign shareholder, the company should also take into account the content of the Article 22c the Corporate Income Tax Act, which limits the application of the tax exemption on dividends from Article 22(4) the Corporate Income Tax Act This provision indicates two the conditions which make the exemption in question not applicable.

After the amendment of the Act from 1 January 2019 the exemption provisions shall not apply if the benefit of the exemption is:

• 1. Conflicting in the circumstances with the object or purpose of those provisions;
• 2. Main or one from the main objectives of the transaction or other activity, or multiple transactions or other activities, and the mode of operation was artificial.

The legislator also defined what should be understood by an artificial action. In its negative definition, it indicated that the action was not artificial if, on the basis of the existing circumstances, it had to be assumed that an entity acting sensibly and in accordance with legitimate objectives would have applied this method to a dominant extent for legitimate economic reasons. Reasons referred to in the sentence first, the purpose of the exemption is not included.

Doubts regarding the application of the revised rules and recommendations

Minister of Finance on 31 December 2018 issued an exemption or restriction regulation Article 26(2e) the Corporate Income Tax Act 10 (hereinafter: Regulation).

This Regulation specifies to what extent and for which groups of taxable persons the abovementioned provision has been excluded or limited. Doubts concern the scope of the exemption and restrictions on the application of the new rules.

Interpretative problems arise on the basis of the Regulation. It follows from the justification for this normative act that it is intended to suspend the application of the new rules on ‘source tax’, which is the legislator's response to the comments made by taxpayers.

The comments concerned, inter alia, a short transitional period allowing taxpayers to prepare to fulfil new obligations (including, inter alia, on obtaining the opinion of the tax authority, requiring exemption from taxation of dividends exceeding 2,000,000 PLN, according to Article 26(2g) the Corporate Income Tax Act).

In reading the reasons for the Regulation, it would therefore appear that the legislator's wish was to postpone all new obligations of payers in the field of ‘source tax’, while the literal wording of the Regulation shows that only the provision is suspended at the time of application Article 26(2e) the Corporate Income Tax Act

This raises doubts as the obligations of payers in the ‘source tax’ also derive from other provisions. An example can be identified Article 26(2g) the Corporate Income Tax Act, according to which the application of the statutory tax exemption paid to a foreign company of dividends may be applied on the basis of the ruling of the tax authority in force (referred to above). Under Article 26b the Corporate Income Tax Act)[11].

Therefore, we are dealing with a situation where one party is indicated to be deferred at the time of application of the provisions ordering the collection of the tax, while second, the parties to the Regulation do not explicitly indicate the suspension of the provisions governing the application of the exemption from having an opinion of the tax authority. Moreover, the application for such an opinion to the tax authority has been introduced with new provisions and is only possible from 1 January 2019 This means that since the tax authority has 6 months for such an opinion, in practice it would be impossible to obtain it in January this year, and thus compliance with the condition for exemption provided for under Article 26(2g) the Corporate Income Tax Act (whose suspension is not explicitly mentioned in the Regulation).

In view of the above doubts and principles of tax law, according to which any relief and exemption provided for in tax law should be interpreted strictly[12] (the prohibition of extension interpretation), pending the resolution of existing doubts, taxpayers may have a major dilemma regarding the correct interpretation of the newly introduced provisions.

On the one hand, Parties may be deemed to Article 26(2g) the Corporate Income Tax Act is not an essential legal basis and cannot be separated from the suspended section 2e impose withholding tax obligations. At that time, the suspension of validity at the time of the said section 2e would, by law, also suspend section 2g.

On the other hand, on the other hand, you can imagine how exhaustive there would be a possible dispute with the tax authority that would conclude that the suspension regulation does not explicitly mention Article 26(2g) the Corporate Income Tax Act and should be used and, therefore, to benefit from the statutory exemption of dividends paid from withholding tax requires the opinion of the tax authority referred to in the amended rules.

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1 i.e. Journal of Laws of 2018, item 1036.

2 Article 22(1) the Corporate Income Tax Act

3 Article 22(4) the Corporate Income Tax Act

4 Article 22(4a)(4b) the Corporate Income Tax Act

5 Article 26(1c) the Corporate Income Tax Act

6 Article 26(1f) the Corporate Income Tax Act

7 Article 26(2e) the Corporate Income Tax Act

8 Articles 26(2g) and 26(7a) the Corporate Income Tax Act

9 Article 26b the Corporate Income Tax Act

10 Journal of Laws of 2018, item 2545.

11 Article 26(2g) the Corporate Income Tax Act : „For claims in question under Article 21(1)(1) or Article 22(1), paid to the company concerned, respectively under Article 21(3)(2) or Article 22(4)(2), or a foreign establishment of such a company, if the total amount of receivables from the titles listed Under Articles 21(1) and 22(1), paid to that taxable person in the tax year applicable to the payer exceeds the amount in question Under section 1, legal persons and organisational units not having legal personality, making payments of these claims, may apply the exemption in question under Article 21(3) or Article 22(4), on the basis of the existing opinion on the application of the exemption in question under Article 26b”.

12 Thus, among others, the Supreme Administrative Court judgment of 30 November 2017, reference no. II FSK 180/16.