Source tax

Source taxation involves income (income) from non-residents, i.e. persons subject to a limited tax obligation.

Tax payers, if they do not have a seat or board of directors in Poland, are subject to a tax obligation only on the income they earn in the territory of Poland (Article 3(2) Act on 15 February 1992 on corporate income tax 1 , Next the Corporate Income Tax Act).

Taxable persons who do not have their registered office or management in Poland are subject to a limited tax obligation resulting from the adoption of the source principle, which involves taxation of income generated in Poland, regardless of where the taxpayer is established or the management board.

1. Reduced tax obligation

It is therefore sufficient to meet one or two of the above conditions. Thus, if the taxpayer is formally registered abroad, and in fact has a board of directors in Poland, it is still subject to taxation in Poland on all of its income (unlimited tax obligation), regardless of where they were obtained.

The condition of having a board should not only be read in a formal sense (i.e. the seat of the managing authority), but also in the sense of carrying out in Poland a team of activities which are functionally composed of the whole process of managing its activities and assets[2].

Example

Alfa sp. z o.o. founded in Cyprus one-hundred-percent Beta's daughter company, which is under Cypriot law an income tax taxpayer. The only partner (Alfa) appointed Jan Nowak and Zygmunt Kowalski – Polish citizens who live permanently in Poland, who are also Alfa's full-time employees.

Members of the Management Board shall decide on the activities of Beta in Poland, agreeing with the management of the Alfa's mother company.

Their visits to the Beta headquarters in Cyprus are occasional and are formal in nature, consisting in adopting a resolution or signing a contract, the content of which has been fixed/negotiated in Poland. The majority of documents relating to Beta’s activities shall be signed by the representatives established in Cyprus.

Although Beta is formally registered abroad, there are reasonable grounds for stating that it actually has a board of directors in Poland and is a Polish tax resident.

In the event of a collision against a double residence of legal persons, the conflict-of-law rule contained in a specific double taxation agreement is decided. In most Polish double taxation agreements, the determining criterion is the actual (actual) place of the board.

2. Revenue (revenue) generated in Poland

Income (revenue) generated in Poland by non-residents is considered to be – according to Article 3(3) the Corporate Income Tax Act – In particular (open catalogue) revenue (income) from:

• 1) all activities carried out in the territory of Poland, including through a foreign plant located in the territory of Poland;
• 2) real estate located in Poland or rights to such real estate, including the sale of it in whole or in part or the sale of any rights to such real estate;

1. securities and derivatives of non-securities financial instruments admitted to public trading in the territory of Poland under a regulated stock market, including those obtained from the sale of those securities or instruments and from the exercise of rights deriving from them;
2. the title of transfer of ownership of shares in a company, of all rights and obligations in a company which is not a legal person or of the titles of participation in an investment fund, of the mutual investment institution or of another legal person, or of claims resulting from the holding of those shares, of all rights and obligations or titles of participation, if at least 50% the value of the assets of such a company, a company which is not a legal person, an investment fund, a joint investment institution or a legal person, directly or indirectly, are real estate located in Poland or the right to such real estate. The value of the assets is essentially determined on the last day of the month preceding the month of receipt of income (Article 3(4) the Corporate Income Tax Act);
3. the title of regulated claims, including those held at the disposal, paid or deducted, by natural persons, legal persons or entities without legal personality, domiciled, established or managed in Poland, irrespective of where the contract is concluded and the performance of the benefit. This revenue (revenue) is considered to be the revenue listed under Article 21(1) the Corporate Income Tax Act (certain types of intangible benefits, see point 3) and Article 22(1) the Corporate Income Tax Act (dividends and other income on corporate income, if they do not constitute income (income) in question Under point 1-4 above (Article 3(5) the Corporate Income Tax Act);
4. Unrealised gains (Chapter 5a) the Corporate Income Tax Act).

Example

Alfa sp. z o.o. based in Poland plans to sell its goods on the German market. The company concluded an agreement with Beta GmbH based in Germany, subject to an unlimited tax obligation, for the provision of advisory and marketing services related to the entry of Alfa into the German market.

Advisory and marketing services are provided by Beta in Germany. Beta GmbH achieves income (income) from the provision of these services in the territory of Poland, even though services are only provided abroad. A sufficient condition is the payment of remuneration by a Polish tax resident (Alfa).

3. Source taxation at national rate

3.1. Review of revenue(s) taxed at source

The table shows the income (income) generated by non-residents in the territory of Poland, taxed with the so-called withholding tax.[3].

Table. Income (income) generated by non-residents in Poland, taxed at source

These tax rules, including in particular the rate of taxation, apply with regard to double taxation agreements to which Poland is party (Article 21(2), Article 22a the Corporate Income Tax Act).

The absence of such an agreement with the State of the taxpayer’s residence makes it necessary to collect withholding tax at national rate (see table). Also, the non-representation of a residence certificate by a non-resident entails the obligation to tax at national rates.

Example

Alfa sp. z o.o. concluded a market service contract with Beta based in Brazil in connection with the planned investment of Alfa in Brazil. Beta is an income tax taxpayer in Brazil. Poland has no double taxation agreement concluded with Brazil. By paying Beta a remuneration for marketing services, Alfa should collect withholding tax of 20% (national rate).

3.2. Provision of services

Provision of these services under Article 21(1)(2a) the Corporate Income Tax Act (Watch point 3.1) can be divided into two groups:

• 1) benefits clearly named (i.e. advisory, accounting, market research, legal, advertising, management and control, data processing, recruitment and recruitment of staff, guarantees and guarantees),
• 2) benefits similar to those named, i.e. having characteristics characteristic of these benefits, but not such.

For the purpose of recognising that a benefit not explicitly specified under Article 21(1)(2a) the Corporate Income Tax Act is covered by its scope, it is crucial that the elements characteristic of the benefits directly mentioned in it outweigh the characteristics of the benefits not mentioned therein[5].

In order to classify certain benefits into taxable benefits with a flat-rate income tax on the basis of Article 21(1)(2a) the Corporate Income Tax Act, the content of the contract underlying them and the extent of the activities actually carried out must be analysed each time.

If the contract includes services/services that are not explicitly mentioned under Article 21(1)(2a) the Corporate Income Tax Act, whether they are legally equivalent to them.

3.2.1. Similar benefits — insurance services

An example of services not expressly listed in Article twenty-one, subsection one, point two(a) of the Corporate Income Tax Act (source notation: 21ust. 1pkt 2au.p.d.o.p.), which in the assessment of tax authorities are subject to withholding tax, are insurance services[6].

In arguing their position, tax authorities recall the content Article 805(1) Act on 23 April 1964 Civil Code 7 ((c) according to which the insurer undertakes, in the course of its business, to meet a certain benefit in the event of an accident provided for in the contract and the policyholder undertakes to pay the premium.

According to the tax authorities, the above indicates that the insurance service is the same as the guarantee service, as the insurer guarantees that in the case of the insurance provided for in the contract it will fulfil a certain benefit.

It should be noted that under Article 15e(1)(1) the Corporate Income Tax Act, of which content is similar to content Article 21(1)(2a) the Corporate Income Tax Act, In addition to guarantee services, insurance services are explicitly listed.

If therefore the legislator under Article 15e(1)(1) the Corporate Income Tax Act indicated the insurance services, it should be considered that it treats these services as separate and non-guaranteed services.

In our view, following the rational approach of the legislature, as well as the linguistic and systemic interpretation, it should be considered that Article 21(1)(2a) the Corporate Income Tax Act does not include insurance services.

If the legislator wanted to tax these services at source, he would have mentioned them in that provision, as he did worth it. 15e section 1 point 1 the Corporate Income Tax Act

3.2.2. Similar benefits — Agency services

Trade brokering services also create interpretational problems. In particular, the main objective of the commercial intermediation service is to achieve the conclusion of a contract, unlike advisory services or market research, the essence of which is the procurement of certain information applicable to the management process of the company. At the same time, the method of remuneration characteristic of brokering contracts is the commission[8].

Contracts with intermediaries may also include other services to which the intermediary undertakes to provide, e.g. market research, which are not invoiced. Depending on the subject of the contract and the nature of the activities actually carried out, there may be doubts as to how to qualify the services of the agent (the intermediary).

From a tax point of view, activities such as assistance in shaping the content of contracts, assistance in editing them or knowledge of potential counterparties with the profile of the client's business can be treated as advisory or advertising services.

For example, in an individual interpretation from 2 August 2019 9 The Director of KIS considered that the remuneration for brokering services, as covering the entire purchasing process, is subject to a source tax because it is similar to advisory, advertising, management and control services and market research services[10].

3.2.3. Benefits of a similar nature – organisation of fairs

As in the case of brokering services, fair organisation services may also be considered to be within the scope of Article 21(1)(2a) the Corporate Income Tax Act, if the invoice includes one the amount, and the scope of the service provider's activities includes a complex of services, e.g.

design, execution and organization of the exhibition stand, its assembly and dismantling, exhibition space rental, entry in the exhibitors' catalogue, printing of information leaflets, advertising folders, business cards, audiovisual service of the stand (e.g.

interactive website for the stand), hosting, technical support of the stand (e.g. media, water charges, electricity, Wi-Fi), parking, catering service, photo service of the stand, etc.

For example, in an individual interpretation from 19 June 2018 11 The Director of KIS considered that such a comprehensive service of the fair organisation is subject to the tax at source as a marketing service[12].

4. Legal exemptions from taxation at source

4.1. Dividends

Based on Article 22(4) the Corporate Income Tax Act Tax-free income (revenue) from dividends and some other income from corporate profit. In addition to dividends, the exemption relates to income on the profits of the legal persons concerned under Article 7b(1)(1) point (a), f and j the Corporate Income Tax Act, and therefore:

1. the balance sheet surplus in cooperatives and received by participants in investment funds or mutual investment institutions of the income of that fund or institution, where the statutes provide for the payment of those income without the redemption of units or the purchase of investment certificates,
2. the equivalent of the profit of the legal person and of the limited-stock company for the increase of its share capital, the equivalent of the balance sheet surplus of the cooperative for the increase of the holding fund and the equivalent of the amounts transferred to that capital (fund) from other capital (funds) of that legal person or company,
3. the value of the undivided profits in the company and the value of the profit transferred to other capitals than the share capital in the converted company, in the event of the transformation of the company into a non-legal company, except that the income is determined at the date of conversion.

The above cases do not relate to revenue obtained by the sub-contractor for the share of profits of the limited partnership. The conditions for application of the exemption shall be the cumulative fulfilment of the following conditions:

1. paying dividends (and other revenue indicated above) is a company which is a taxable person of income tax, established or managed in Poland;
2. the recipient of the dividend (and other revenue indicated above) is:

(a) a company subject to an unlimited tax obligation in Poland or in another EU or EEA Member State or in the Swiss Confederation,

(b) located in the territory of an EU or EEA Member State or in Switzerland, the foreign establishment of that company;

1. the company receiving the dividend (and the above-mentioned other revenues) has directly no less than 10% (25% in the case of a resident of Switzerland), shares in the capital of the dividend paying company;
2. the holding by the company receiving the dividend of the share in the company paying it continues continuously for a period of time 2 years, where this condition may also be fulfilled after the date of receipt of the dividend, the holding of shares should be essentially due to ownership;
3. the company receiving the dividend does not benefit from an exemption from taxation on income tax on its total income, regardless of the source of its achievement (based on Article 26(1f) the Corporate Income Tax Act a written statement in this respect is necessary;
4. the company receiving the dividend will provide a residence certificate – in the case of dividends paid to recipients established in a Member State other than the Polish EU or EEA – or a certificate that its foreign establishment exists (Article 26(1c) the Corporate Income Tax Act);
5. there is a legal basis under the double taxation agreement or other ratified international agreement to which Poland is party for obtaining tax information from the tax authority of the State where the taxpayer is established or where the income has been obtained (Article 22bu.p.d.o.p.).

Example

Alfa sp. z o.o. ma two partners – Beta GmbH based in Germany and Sigma based in Russia. Partners are income tax taxable persons in their country of residence (the residence certifications have been submitted) who do not benefit from the tax exemption on their total income.

The partners have 50% shares in Alfa’s share capital for a period exceeding 2 years. The dividend paid to a partner Beta may in principle benefit from the tax exemption at source. The dividend paid to Sigma’s partner cannot benefit from the exemption because Sigma is not a resident of an EEA State.

Subject to Article 22c the Corporate Income Tax Act the benefit in the form of a dividend exemption shall not be granted if the benefit was:

• 1) contrary in the circumstances to the object or purpose of the exemption provisions,
• 2) the main objective or one the main objectives of the transaction (many transactions) or other activity were to obtain income tax exemption and the mode of operation was artificial.

The mode of action is not artificial if, on the basis of the existing circumstances, it is appropriate to assume that a reasonable and legitimately motivated entity would apply this method to the greatest extent for legitimate economic (non-tax) reasons.

The assessment of whether an arrangement constitutes an abuse should take into account an objective analysis of all circumstances of the case. The taxpayer should, in particular, demonstrate that a specific method of action has been chosen for all legitimate economic (economic) reasons other than obtaining a tax advantage.

Example

Alfa sp. z o.o. retains profits (the decision of the shareholders' meeting), paying them for the reserve. The sole shareholder is a US resident capital company. In 201X, all accumulated profits are planned to be paid. At the beginning of this year, the shares under the title of darmy are transferred to a related capital company based in the Netherlands. To the extent that there is no economic justification for the transfer of shares, the dividend will not be exempt from income tax (collected by Alfa at source).

When verifying the conditions of application of the exemption, the payer shall be obliged to exercise due diligence.

The consequence of failure to meet the condition of holding a direct share of at least 10% continuously for a period 2 years is the obligation for the taxpayer to pay tax, together with interest on late payment, in the amount of 19% revenue to 20. the day of the month following that in which the taxable person lost his right to release.

Interest shall be calculated from the day following the date on which the taxpayer benefited from the exemption (Article 22(4b) the Corporate Income Tax Act).

The taxpayer shall make a declaration CIT-6AR („Declaration of the amount of income tax on corporate income) to the end first the month of the year following the tax year in which the obligation to pay the tax arose (Article 26a the Corporate Income Tax Act).

4.2. Interest or royalties

Based on Article 21(3) and n. the Corporate Income Tax Act interest or royalties shall be exempt from taxation if the following cumulative conditions are met:

1) the payment of interest/licensing dues is:

(a) a company which is a taxable person of income tax established or managed on the territory of Poland (except for a limited partnership),

(b) the foreign establishment of a company subject to income tax in an EU Member State on all of its income, irrespective of where it is achieved, is located in Poland if the interest/licensing receivables paid by that foreign establishment are included in the cost of obtaining income in determining taxable income in Poland;

1. A company which is subject to an unlimited tax obligation in a State other than Poland which is owned by the EEA is the holder of interest/licensability income;
2. the company receiving the interest/licensing dues has directly for a period of at least 2 years not less than 25% shares (shares) in the capital of the company paying them, and this ownership derives from ownership, or the company paying the interest/license receivables holds directly for at least a period of time 2 years not less than 25% shares in the capital of the company receiving them, and this ownership is due to ownership. This condition will also be met when, in both the capital of the company receiving the interest/licensing dues and the capital of the company paying it to another company subject to taxation in the EU Member State or to another EEA State on the income tax on its total income, irrespective of where they are achieved, it holds directly for a period of at least 2 years not less than 25% shares/shares. In this respect, a written statement is needed (Articles 21(3a) and 26(1f) the Corporate Income Tax Act);
3. the actual owner of the interest/licensing receivables is:

(a) a company obtaining them, subject to an unlimited tax obligation in an EEA State other than Poland,

(b) the foreign establishment of that company, if the income generated by obtaining the interest/licensability is taxable in that EU Member State in which that foreign establishment is located (a written declaration is necessary; Article 26(1f) the Corporate Income Tax Act);

1. the recipient company does not benefit from an exemption from tax on its total income, regardless of the source of its achievement (a written declaration needed; Article 26(1f) the Corporate Income Tax Act);
2. the recipient company will submit a residence certificate or certificate of the existence of its foreign establishment (Article 26(1c) the Corporate Income Tax Act);
3. there is a legal basis resulting from a double taxation agreement or other ratified international agreement to which Poland is party for obtaining tax information from a tax authority other than Poland of the country where the taxpayer is established or where the income has been obtained (Article 22b the Corporate Income Tax Act).

It should be borne in mind that also with regard to the exemption from taxation of interest and royalties, the so-called ‘small anti-tax avoidance clause’ contained in the under Article 22c the Corporate Income Tax Act (see appropriate point 4.1). According to Article 21(8) the Corporate Income Tax Act The exemption rules shall apply mutatis mutandis to those entities In Annex 5 to the Corporate Income Tax Act, of which CIT-based companies based in Switzerland.

When verifying the conditions of application of the exemption, the payer shall be obliged to exercise due diligence.

Example

Alfa sp. z o.o. pays interest to:

1. a capital company resident in Austria, in which Alfa’s capital is directly owned by 25% continuous from 2 years,
2. branch(s) of a Belgian capital company located in Austria — Belgian company has a direct share of Alfa’s capital 25% continuous from 2 years. The relevant residence certificates and certificate of establishment in Austria were submitted. In the first Alpha case — holding a stake in a company established in the EU 25% continuous from 2 years – is in principle entitled to apply the tax exemption. In the case of an establishment located in the EU set up by a resident company of another EU Member State which has direct shares in Alpha of 25% continuous from 2 years, may also find the application of the exemption.

If the condition of possession is not met, at least 25% shares (shares) continuously by 2 years a company receiving a licence fee is required to pay tax, plus interest for late payment of the amount 20% revenue, including double taxation agreements to which Poland is party. Interest shall be charged from the day following the expiry of the tax payment period (Article 21(5) the Corporate Income Tax Act).

5. Withholding taxation under double taxation agreements

5.1. Dividends

The dividend payment should be understood broadly. As a general rule, the payment shall constitute the execution of the dividend obligation to the shareholder or shareholder in any way provided for in the contract or normally accepted, including in the form of a grant.

The application of double taxation agreements concluded by Poland makes the right of the source state (here: Poland) to tax nonresident income obtained in Poland limited to a percentage of the amount – 5% or 15% (according to the OECD Model Convention, hereinafter: KM OECD), depending on the size of the shares held in the capital of the company and the legal form of the beneficiary.

If the beneficiary is a natural person or a company, the tax may not exceed 15% gross dividend amount. Only if dividends are obtained by a capital company holding significant shares (according to the OECD GAAP at least 25%), Most contracts concluded by Poland provide for a reduction of the tax rate to 5% gross dividend amount.

Other participation thresholds for preferential application may be reserved in individual contracts 5% rates, often at least 10% the capital of the company. Individual agreements also introduce for example one maximum rate of withholding tax (e.g.

agreement with Hungary – 10%; Convention between the Republic of Poland and the Republic of Hungary on the avoidance of double taxation on taxes on income and property, drawn up in Budapest 23 September 1992, (hereinafter: ZPOO Hungary) or exemption (e.g.

agreement with Switzerland; Convention between the Republic of Poland and the Swiss Confederation on the avoidance of double taxation in the field of income and property taxes, drawn up in Berne 13 , hereinafter ZPOK Switzerland).

Bilateral agreements exclude the application of a reduced rate of withholding tax if the recipient of the dividend is not a person entitled to dividends.

The concept of an eligible person is linked to the phenomenon of shopping (purchase of contractual benefits), for example, where a non-resident party to a double taxation agreement assumes in that country a non-transparent company which benefits from this bilateral agreement[14].

Example

one from the shareholders of Alfa sp. z o.o. is the company Beta GmbH based in Germany (equivalent to the Polish company z o.o.). Beta owns 5% shares in the share capital of Alfa. Alpha pays his partner Beta a dividend.

As agreed with 14 May 2003 on the avoidance of double taxation with Germany 15 , In Poland, the rate of withholding tax will be applied: 1) 5% the gross dividend amount if the person entitled is a company (other than a passenger company) whose direct share in the capital of the company paying the dividend is at least 10%, 2) 15% gross dividends in all other cases.

On the dividend paid to Beta, tax will be collected at source at the rate 15% (instead of the national rate 19%).

The application of the tax rate resulting from the relevant double taxation agreement is possible provided that the registered office of the taxable person for tax purposes is documented with a residence certificate obtained from the taxable person (see residence certificate). point 5.2). When verifying the conditions for applying a tax rate other than the national rate, the payer shall be obliged to exercise due diligence.

5.2. Interest or royalties

5.2.1. Definition of interest

Under OECD KM-based double taxation agreements, interest is income from all types of claims, both secured and unsecured by mortgages, or related to the right to participate in the profits of the debtor, in particular income from government securities and income from bonds or debt scripts, including premiums and rewards related to such securities, bonds or debt scripts.

Criminal charges for late payment shall not be considered as interest[16]. The term ‘all types of claims’ includes cash deposits and values in monetary form as well as sovereign securities, bonds and debt notes. Interest on mortgages is considered to be a category of income from movable property[17].

Exceptionally, interest on bonds or debt notes giving the right to participate in the profits of the debtor shall be considered as dividends if the lender actually shares the risk borne by the borrowing company[18].

The OECD KM comment lists the following factors which may indicate that the lender assumes part of the risk associated with the borrower's business:

1. the amount of the loan significantly exceeds the value of other contributions to the capital of the company (or the loan has been drawn to supplement the significant part of the capital that has been lost) and does not significantly match the value of the negotiable assets,
2. the borrower has the right to participate in the profits of the company,
3. repayment of the loan is subordinated to the claims of other lenders or to dividend payments,
4. the amount or repayment of interest depends on the profits of the company,
5. the loan agreement does not define a specific date for repayment of the loan[19].

Interest on loans that meet the above criteria may be considered as dividend payments in the country of origin (in accordance with bilateral agreement or internal law applicable in the country of origin). A collision cannot be ruled out when the State of residence of the recipient company qualifies them as interest.

Profit or loss on the sale of securities is not covered by the interest provision[20]. According to Article 10(3) The OECD KM penalty fees for late payment shall not be treated as interest. The various agreements concluded by Poland provide for other exemptions, e.g.

under the agreement with Canada 21 ‘interest’ does not include the income in question under Article 8 (maritime and air transport) or Article 10 (dividends).

5.2.2. Definition of royalties

The term ‘licensing receivables’ means any claim paid for the use or use of any copyright in a literary, artistic or scientific work, including films for cinemas, any patent, trademark, design or model, plan, technology secret or production process or for the use of professional experience in industrial, commercial or scientific fields (Article 12(2) OECD KM).

Poland has reserved the right to include in the definition of royalties income obtained from use or right to use industrial, commercial or scientific equipment and containers. Thus, in most of the agreements concluded by Poland to avoid double taxation in the definition of royalties, there is such income (income).

However, if the payment is made in return for the transfer of the full right of ownership, such payment shall not be considered to have been paid ‘for use or for use’ of the property and therefore cannot be regarded as a royalty[22].

Where no licence fee for the use of rights to computer programs is listed in a particular double taxation agreement, the copyright fee for the computer program shall not constitute a licence fee within the meaning of that agreement.[23].

Credit claims for the use of copyright in a computer program should therefore not be identified with royalties for the use of copyright in a literary work, unless a specific bilateral agreement indicates them in the definition of royalties[24].

Computer programs were not classified as literary works by the Polish legislator, but are treated as literary works in terms of copyright protection. Nor can they be identified with a scientific or artistic work because they are treated as a separate type of work.

More complex interpretation problems involve the identification of end-user licenses (end-user type). As a general rule, end-user charges should not be treated as claims for the use of copyright and thus royalties.

5.2.3. Withholding tax rate

Collection of interest income tax at rate 20% usually does not occur due to the provisions of double taxation agreements. Article 11(1)(2) The OECD KM shows that interest is essentially (full) taxed in the lender’s country of residence. However, the country of origin, i.e.

the country where the interest arises (here: Poland), may also tax interest in accordance with its internal legislation, but if the actual beneficial owner is resident second States, this tax cannot exceed 10% the gross amount of those interest. In many double taxation agreements concluded by Poland, this rate is reduced to 5%.

Many of them also provide in part for the absence of the collection of withholding tax, e.g. for interest generated In one State and achieved by the government second States, including their territorial units, the central bank or any financial institution controlled by that government, or interest on loans guaranteed by that government.

Under the OECD KM, the rules on the taxation of royalties are different from those on interest. Licence claims arising in a Contracting State and paid to an authorised person, domiciled or established In the second to a Contracting State, are taxable only in this second country (Article 12(1) KM OECD), i.e. without withholding tax.

However, Poland reserved the right to tax royalties at source, hence the double taxation agreements concluded by Poland provide for this possibility.

For example, the agreement with Germany contains a regulation that in the country of origin (here: Poland) the rate may be applied 5% the gross amount of royalties if the person entitled to the royalties is resident in Germany.

5.3. Revenue related to the operation of the establishment

The rules on taxation of dividends, interest or royalties are modified if the non-resident has an establishment in the country of residence of the subsidiary (the so-called reservation of the establishment).

Non-resident claims may be taxed in full in the country of origin (here: in Poland) only if the shares or rights under which those claims are paid are attributable to the establishment and are related to the operation of the establishment.

Based on Article 10(4), Article 11(4) or Article 12(3) OECD KM Provisions apply Article 7 (the profits of undertakings), if the person entitled to a claim established in the Contracting State performs In the second to the contracting State in which the company paying the dividends, interest or royalties is situated, to the business activity through an establishment situated therein and where the share or right in which dividends, interest or royalties are paid actually relates to the activity of such an undertaking.

It is therefore crucial to determine whether there is a ‘actual association of shares/rights’ with the activity of the undertaking. The OECD comment states that dividends are taxed as part of the undertaking’s profit if they are paid for shares forming part of the undertaking’s assets or if they are otherwise effectively linked to the undertaking[25].

Such claims should be taxed in accordance with the provisions on dividends, interest or royalties respectively (see points 5.1 and 5.2), where they are not in a functional relationship with the activities carried out by the undertaking. Determination of the grounds for the adoption of the ‘actual link between shares and the activity of the plant’, which is important for the qualification of income under the bilateral agreement on the avoidance of double taxation, has not yet received the positions of Polish tax authorities or administrative courts[26].

Example

Alfa GmbH based in Austria, having a tax facility in Poland, hired an unrelated Beta sp. z o.o. with a specialist machine based in Poland. The machine is a permanent measure of the Polish Alfa plant, which uses it to carry out contracts in Poland. The royalties paid by Beta are part of the profits of Alfa in Poland. Beta doesn't collect withholding tax on them.

Persons who pay claims to non-residents operating through a foreign establishment located in the territory of Poland shall not collect flat-rate tax on condition that the place of residence of the taxable person obtained from him by the residence certificate and obtain a written declaration that these claims are related to the activity of that establishment.

The declaration should include the identification of the taxable person established through a foreign establishment located in Poland, in particular the full name, address and tax identification number of the taxable person and the address of the foreign establishment of the taxable person (Article 26(1d-1e) the Corporate Income Tax Act).

An obligation under which, for example, interest is paid may arise in connection with the activity of the undertaking and the interest payment shall be paid by the undertaking. It is then considered that interest arises in the State where the establishment is situated.

Example

Gama GmbH, based in Austria, has a branch in Poland (establishment). An unrelated Alfa GmbH based in Germany granted a loan to Gama GmbH. The loan is used for the needs of the Polish Gama plant, the interest costs are borne by this branch.

In such a situation, it is justified to assume that interest on the loan arises in Poland, and at the time of the payment (capitalisation) interest should be collected in Poland with a withholding tax. The amount of the tax depends, among others, on having an Alfa GmbH residence certificate before payment (capitalisation).

It should be noted that, in the situation illustrated by the above example, the tax authorities have already recognised the absence of an obligation to collect tax by the undertaking, since the branch is not resident. The obligations of the payer would have to be fulfilled by a foreign parent (Under Article 3(3)(5) the Corporate Income Tax Act refers to claims paid by residents). Similar arrangements apply to royalties.

Where the seat of the company paying the dividend is not in the State of establishment, the same criteria shall be applied when determining the method of taxation as above and not applicable. Article 10(4) OECD KM (dividends), but Article 21(1) OECD KM (other revenue).

The revenue of a person established in a Contracting State, irrespective of where it is achieved and not covered by the previous Articles of OECD KM, shall be taxable only in the State of residence. As regards ‘other income’, the reservation of the establishment also applies (Article 21(2) The OECD KM), i.e.

if there is a link between income generated and the business of the plant, the State has the right to tax them.

5.4. Provision of services

Under double taxation agreements to which Poland is party, remuneration for the provision of defined services under Article 21(1)(2a) the Corporate Income Tax Act is in principle eligible as corporate profits (Article 7 OECD KM-based contracts) taxed in the country of the tax residence of the service provider.

The condition not to collect withholding tax under such an agreement is to document the place of residence of the taxable person for tax purposes with a residence certificate obtained from the taxable person.

When verifying the conditions for applying a tax rate other than the national rate, the payer shall be obliged to exercise due diligence. Also in the case of such services provided by a tax establishment (e.g. a branch) not resident in Poland, the Polish customer does not have to collect the tax at source.

The conditions, such as documentation of the place of residence of the non-resident taxable person obtained from him by the residence certificate or a written declaration that the service claims are related to the operation of that establishment (Article 26(1d)(1e) the Corporate Income Tax Act). (…).

The payer is obliged to send to the taxable person subject to a limited tax obligation in Poland and to the tax office competent in matters of taxation of foreign persons information about the payments made and the tax collected.

This is a form IFT-2/IFT-2R – „Information on the amount of income (income) obtained by taxpayers of income tax on non-resident corporate persons or management in Poland.’ This information is provided by the payer to the end 3.

the month of the year following the tax year, or if the activity ceases before the expiry of that period until the date of cessation.

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The article comes from the book Tax and Balance sheet Closing of the Year 2019” under ed. prof. nadzw. dr. hab. Artur Hołda, published by C.H. Beck Publishing House In 2019; https://www.ksiegarnia.beck.pl/18745-podatkowe-i-bilansowe-zamkniecie-roku-2019-artur-holda