Instructions for using the tax residence certificate

When making payments to a foreign entity, the entity making such payments should consider whether it is not subject to the obligations of a tax payer in accordance with Article 26(1) Act on 15 February 1992 on corporate income tax 1 (in case of payment of benefits to the payer by foreign legal persons) or, respectively, Article 41(4) Act on 26 July 1991 on personal income tax 2 (when paying for services rendered by foreign natural persons).

If the benefits referred to in the detailed rules are paid the Corporate Income Tax Act or u.p.d.o.f., then the payer is obliged to collect and deduct the flat-rate tax. In what version should a tax residence certificate be provided so that it can be considered as a sufficient basis for the payer to waive or apply a reduced tax rate?

1. Introduction

The amount of flat-rate tax rates is determined Under Articles 21(1) and 22(1) the Corporate Income Tax Act (by under Article 29(1) and Article 30a u.p.d.o.f.) and in principle shall be:

• 1) 20% – including interest paid to legal persons, royalties and advisory services,
• 2) 19% – inter alia, interest paid to natural persons and dividends paid to foreign natural and legal persons,
• 3) 10% – Among others, due to revenues obtained in Poland by foreign air navigation companies.

However, according to Article 26(1) the Corporate Income Tax Act and Article 41(2a) The payer shall apply the reduced rate resulting from the relevant double taxation agreement, or shall waive the collection of the tax in accordance with that agreement, provided that the registered office of the foreign taxpayer is documented for tax purposes by the taxable person's tax residence certificate.

2. Definition of tax residence certificate

As defined under Article 4a(12) the Corporate Income Tax Act and Article 5a(21) u.p.d.o.f. a tax residence certificate is a certificate of the place of residence of the taxable person (or, respectively, the place of residence of the natural persons) for tax purposes issued by the competent authority of the tax administration of the State of residence or residence of that taxable person. The tax residence certificate must therefore comply with the following conditions:

• 1) it must be a document issued in accordance with national internal regulations (in practice it is either paper or electronic),
• 2) the document must state that the taxable person concerned has a place of residence for tax purposes (or a place of residence in the case of taxable persons) in the country concerned,
• 3) it must be a document issued by the competent tax authority of that State.

The above conditions indicate that a document confirming the registration of the company in the commercial register or the place of registration at the address in question in the case of a natural person cannot be considered a residence certificate. Furthermore, the certificate of the tax residence is not a document confirming the payment of local taxes, as the purpose of the certificate is to confirm the place for settlement of central taxes rather than local taxes.

3. Form of tax residence certificate

The tax rules define what a tax residence certificate is and what the conditions of the document must meet to be regarded as giving rise to a lower tax rate or tax waiver by the payer. However, no tax provision shall explicitly state in which version the certificate should be provided so that it can be regarded as a sufficient basis for the payer to waive or apply a reduced tax rate. In practice, the following forms of tax residence certificate are met:

• 1) in paper version with the original signatures of persons entitled to issue it,
• 2) in the paper version, either as a printout of an electronic version or as a paper version scan with original signatures,
• 3) in electronic version.

Lack of statutory regulation has caused – especially in the legal state in force to the end 2018 – that there was a dispute with the tax authorities as to whether it was sufficient for the payer to obtain the electronic version of the tax residence certificate, or whether it should always be the original paper version.

The position of the tax authorities in relation to which form of residence certificate is required for effective tax evasion or for the application of a lower tax rate was divergent. However, it seems that the view of the payer's requirement to obtain a paper version of the tax residence certificate prevailed.

If the interpretive authorities agreed to accept an electronic version of the tax residence certificate, it would normally be on condition that in a given country it was impossible to obtain a tax residence certificate in a non-electronic form.

It is only in the newer positions presented by the interpretive bodies that a more liberal interpretation line is formed, recognising that the certificate can be delivered electronically also when both electronic and paper certificates are issued in a given country.[3].

However, in general it should always be the original version of the certificate (possibly a certified copy of it), rather than a copy without maintaining any particular form[4].

The disunity of the approach of the interpretation authorities to this issue and the generally restrictive line of this approach posed a significant problem for economic trade, especially in relation to transactions with large foreign entities, which, if they were to provide the original paper tax residence certificate to each individual tax payer from Poland, would have to reorganise their internal procedures and prepare significant amounts of them. Not wanting to do this, these entities used a practical approach, providing only electronic versions of their tax residence certificate, which did not always meet the expectations of Polish payers aware of the tax risk associated with the restrictive approach of Polish interpretation bodies to the issue.

This issue was also relevant because the tax residence certificate – according to Article 26(1) and the Corporate Income Tax Act and Article 41(9a) u.p.d.o.f. – should be updated on an annual basis. The legislator decided to partially regulate this issue by providing for the possibility to use in certain situations a copy of the tax residence certificate – without having to maintain a particular form.

4. Could use a copy of the tax residence certificate

This issue is governed by the Act of 23 October 2018 amending the Personal Income Tax Act, the Corporate Income Tax Act and certain other acts[5] Article 26(1n)(1o) the Corporate Income Tax Act and Article 41(9e) This provision shows that, in the case of the revenue in question, under Article 21(1)(2a) the Corporate Income Tax Act (by Article 29(1)(5) (u.p.d.o.f.) the place of residence (in the case of natural persons) of the taxable person for tax purposes may be confirmed by a copy of the residence certificate if the amount of claims paid to the same entity does not exceed 10,000 PLN in the calendar year (in the case of natural persons, respectively, in the tax year) and the information resulting from a copy of the residence certificate submitted does not give rise to reasonable doubts as to whether it complies with the facts.

Therefore, this preference was introduced taking into account two conditions. After first, This applies only to selected types of payments made abroad. This is only about payments from defined titles under Article 21(1)(2a) the Corporate Income Tax Act (by Article 29(1)(5) (u.p.d.o.f.), i.e. for benefits:

• 1) advisory,
• 2) accountants,
• 3) market research,
• 4) legal services,
• 5) advertising services,
• 6) management and control,
• 7) processing of data,
• 8) recruitment and recruitment services,
• 9) guarantees and guarantees,
• 10) benefits similar to those mentioned above.

Consequently, the possibility to document the place of residence or residence of a foreign counterparty for tax purposes with a copy of the tax residence certificate is not acceptable in the case of payments made abroad from titles other than those mentioned above, i.e. e.g. interest or royalties.

After second, the preferential treatment applied applies only to claims whose amount paid to the same foreign recipient does not exceed 10,000 PLN in the calendar year (tax year). This means that the Polish payer may apply a reduced tax rate or depart from tax collection for payments up to the above amount, but in the event that the limit threshold is exceeded during the year, he will be required to obtain the original residence certificate.

Example

The Polish company pays the fees for purchased licensing services abroad. Since the beginning of January 2019 the company incurred the cost of the licence in terms of 8,000 PLN.

In September 2019, in connection with the development of its business, the company purchased more licenses for new computers, bearing an additional cost 4,000 PLN.

It means that if first payments Polish company may have used a copy of the certificate of tax residence (in practice, giving up flat-rate tax collection), but when paying the next part of the salary the original certificate of residence is needed, as the value of the payment exceeded the threshold per year 10,000 PLN.

This change appears to be a positive change for Polish payers purchasing services from abroad. However, attention should be paid to at least two practical issues. After first, the favourable arrangements concern only low-cost payments. For those making larger payments, this change will not be practical, and it may even be difficult.

If in the legal state applicable to 31 December 2018 there were no detailed tax regulations on the form of a tax residence certificate, but during a possible tax check the payer could argue that the copy of the certificate held was sufficient to document the possibility of applying the tax rate from the relevant double taxation agreement and his position was not unreasonable.

In the current state of the law, it is clear that the use of a copy of the tax residence certificate for payments exceeding the threshold 10,000 PLN It's not possible anymore.

This relates to second issue. Namely, there is no statutory definition of the term ‘copy of a tax residence certificate’.

In the light of the tax rulings issued so far, the interpretive authorities treated as a copy of the tax residence certificate a paper version not containing the original written signature of the person issuing it and a scan from the paper original to the electronic version (the electronic version generated immediately as an electronic document was treated as an electronic version satisfying generally the conditions to be regarded as a full-fledged tax residence certificate).

This legislative imperfection causes disputes to arise between tax authorities and payers as regards the treatment of certain certificates as a copy, which will apply in particular to the electronic version, where it is difficult to determine whether it was originally generated in electronic form or merely a paper version scan.

On the occasion of this amendment, by means of the amending law, it was introduced into the Corporate Income Tax Act yet one modification. It concerns the formal requirement indicated under Article 26(1d) the Corporate Income Tax Act Under that provision, in the case of payment of entitlements from the titles listed under Article 21(1) the Corporate Income Tax Act to non-residents operating by a foreign establishment located in the territory of the Republic of Poland, Polish payers, in order to waive the collection of flat-rate tax on these payments, must also obtain a written statement, in addition to the certificate of the tax residence, confirming that the claims paid are related to the activity of that establishment.

However, the amending law introduced an exception to the above rule.

According to Article 26(1o) the Corporate Income Tax Act the condition in question under Article 26(1d) the Corporate Income Tax Act, does not apply to NBP in respect of interest or discount payments to taxpayers in question under Article 3(2) the Corporate Income Tax Act(and thus essentially non-residents), which are banks or credit institutions within the meaning of the Law on 29 August 1997 – Banking law 6 , operating in the territory of the Republic of Poland through a branch which is a foreign establishment, if the payment of claims is made in connection with the implementation of monetary policy by the NBP and these claims are related to the activity of that foreign establishment.

Although according to Article 6(1)(2) the Corporate Income Tax Act NBP is an entity exempt from corporate income tax, but has not been exempted from the obligation to perform the functions of a Polish tax payer in case of foreign payments.

The flat-rate income tax collected by the Polish payer is the tax of this foreign taxpayer for revenues generated in Poland through the Polish payer.

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