On 27 November 2024 The Ministry of Finance has published a general interpretation on the application of the withholding tax exemption (WHT) to interest and royalty payments paid to nonresidents as defined in Article 21(1)(1) CIT Act.
The general interpretation published concerns one of the conditions for exemption from taxation indicated in Article 21(3c) CIT law, the interpretation of which is the subject of divergent case law of administrative courts.
According to the general interpretation, compliance with the condition ‘not to benefit from the exemption from income tax on all of its income, regardless of the source of its achievement’ should be understood as meaning that the recipient of such interest or royalties:
- 1) does not benefit in the State of his tax residence from the exemption from income tax, from all income obtained, or from the exemption from income tax of certain categories of income, or
- 2) special rules for the taxation of income tax on income received by an interest or/and royalty receivable.
In the opinion of the Minister of Finance, the above condition should be assessed in the context of the tax provisions in force in the country of the tax residence of that company or on the basis of special tax preferences granted by the tax administration of that country, for example on the basis of an administrative decision.
At the same time, according to the published general interpretation, the fact that, in view of the individual situation of the taxpayer concerned, the income tax in the country of residence (e.g. accounting for the tax loss incurred) does not, on a case-by-case basis, show that the criterion in question is not met.
In this respect, however, the Minister of Finance pointed out the possibility of assessing the individual situation of the taxpayer and the question of the non-payment of income tax by the prism of the provisions of Article 22c The CIT Act, i.e. a provision allowing the refusal to apply the exemption, if the benefit of the exemption from the WHT would be contrary to the objective of the exemption provisions.
Comment
The position presented by the Minister of Finance raises numerous controversy related, among others, to the failure to take account of the demands made by the social side during the work of working groups concerning the withholding tax operating with the Minister of Finance.
In this regard, attention should be paid to two issues which may affect the decisions of taxpayers who have paid or planned to pay interest and royalties.
First of all, according to the general interpretation, the condition that the tax exemption at source of interest or royalty is not used by the recipient either by the entity or by the entity concerned. This means that if the foreign taxpayer was exempt from interest tax in the country of its registered office, the exemption from withholding tax in Poland will not apply.
It should be recalled that, in essence, this condition applies only to an individual exemption.
It is also worth reminding that 20 November The Ministry of Finance published a general interpretation (No. DD9.8202.1.2024) concerning certain conditions of application of the dividend exemption laid down in Article 22(4) The CIT Act, which takes a different view, states that the non-fulfillment of the condition that the recipient does not benefit from the tax exemption can only be referred to in the case of an exemption of a subjective nature.
It is difficult to find a justification for the different understanding by the Ministry of Finance for the application of the exemption from taxation of royalties and dividends.
The second point to draw attention to when examining the general interpretation is that the status of the recipient in relation to the payments received should be assessed not only on the basis of foreign tax rules but also in the context of administrative decisions made to that taxpayer.
In conclusion, the general interpretation provided should allow for the resolution of disputes concerning the possibility of applying an exemption from interest and other claims in situations such as the settlement of tax losses incurred by him, at the same time it cannot be considered to be fully beneficial to taxpayers as it indicates that the application of the exemption is also limited by the recipient's use of the exemptions in question.
The tax payers are left with a broader analysis of the planned accounts for interest and royalties paid, as well as to see how the published general interpretation will affect the interpretation of the provisions on the exemption from WHT by tax authorities.