Pay & Refund in Poland – a complicated withholding tax (WHT) refund procedure
22 July 2024
The Pay and Refund mechanism, i.e. refund of withholding tax, is a complicated process that not everyone can easily use. It primarily requires a lot of time, proper preparation and analysis of documentation, and strict adherence to deadlines. We remind you what the Pay and Refund mechanism is, how to use it, and what difficulties you may encounter.
Withholding tax – what is it?
Withholding Tax (WHT) is a flat-rate personal and legal income tax levied on certain income, including: from dividends, interest, or royalties. In Poland, it applies to payers who have their place of residence, registered office, or a so-called foreign establishment in the country.
Withholding tax is a specific form of tax levied on cross-border payments. Typically, withholding tax is referred to in the context of tax levied on certain income earned in Poland by non-residents. In some situations, it is also collected from residents (e.g., when dividends are paid to a domestic entity).
Pay & Refund mechanism for WHT
The Pay and Refund mechanism for Polish withholding tax, in its current form, has been in effect since January 1, 2022. The mechanism involves the payer’s obligation to collect withholding tax (WHT) at the basic rate (19% or 20%). Subsequently, if all conditions are met, the payer submits an application to the tax office to confirm and refund the overpayment.
The Pay and Refund mechanism applies to payments of passive income subject to withholding tax (dividends, interest, licenses) to related entities that are not Polish tax residents, on a value exceeding PLN 2,000,000 in total to the same taxpayer in a given tax year.
The Pay & Refund mechanism does not apply to:
- payments to Polish tax residents;
- payments for intangible services (e.g., advisory services, accounting services, legal services);
- payments to unrelated entities;
- fees for services provided in the field of entertainment, recreational or sports activities.
Taxpayers or payers who have paid the tax are entitled to receive a tax refund of withholding tax, provided they have paid the tax. The payer is obliged to exercise due diligence when verifying the right to apply a preferential rate or exemption.
The WHT refund procedure consists of four stages:
- submission of the appropriate form to the tax office;
- attachment of relevant documentation that justifies the refund;
- determination of the refund amount in the form of an administrative decision by the tax office;
- WHT refund – immediately, no later than 6 months from the date of receipt of the application.
The documents that must be attached to an application for a refund of withholding tax under the pay and refund mechanism must include:
- taxpayer’s residence certificate;
- confirmation of bank transfers or other documents indicating the method of settlement or transfer of receivables;
- mandatory declaration of the truthfulness of all facts presented in the application.
Withholding tax and difficulties in using the Pay & Refund mechanism – complex procedure, deadlines, and administration
The pay and refund mechanism for withholding tax is neither easy nor quick. It involves an administrative procedure, an extensive number of documents and numerous doubts and questions that may arise on the part of the tax authority considering the legitimacy of the refund. The process can be long, tedious, and very complex, which means that entities are often surprised by the scale they have to face in obtaining the required documents in the withholding tax (WHT) refund process. Proper planning of work, considering the schedule and amounts, is essential to use the pay and refund mechanism.
In addition, the matter is not made easier by the fact that the level of awareness of how to take advantage of the taxpayer’s exemption or the possibility of applying rates lower than the basic 19% and 20% remains low. The basis for this will be the payer’s proof that the preference is granted on the basis of specific regulations or an appropriate double taxation agreement.
Another problem in the application of the Pay and Refund mechanism and withholding tax refunds are the deadlines. Submission of information (declaration) WH-OSC/WH-OSP by the payer is, along with obtaining an opinion on the application of preferences, one of the ways to waive the withholding tax at the basic rate.
The statement must be submitted to the tax authority no later than the last day of the second month following the month in which the amount of PLN 2,000,000 was exceeded. Information submitted after the statutory deadline is irreversibly ineffective and results in the obligation to collect the tax at the basic rate. Additionally, sending late i WH-OSC/WH-OSP information most often results in the office initiating verification activities.
The second option that allows for the exclusion of the Pay and Refund mechanism is to obtain an opinion on the application of preference referred to in Art. 26b of the CIT Act. An application for an opinion on the application of preferences is subject to payment to the account of the tax authority within 7 days from the date of submission of the application, otherwise it will not be considered. The opinion is issued without undue delay, but no later than within 6 months from the date of receipt of the application to the tax authority.
The final difficulty in the case of the Pay and Refund mechanism for withholding tax is that only one authority is competent to rule and issue opinions on the application of WHT preferences – the Head of the Lublin tax office. This results in difficulties to issue opinions efficiently due to the large number of inquiries from all over Poland. Additionally, there are no clear guidelines, which often causes some discrepancies in case law. Therefore, it is crucial that the application and documentation for the Pay and Refund mechanism for withholding tax are carefully prepared.
getsix® – Professional Tax Advisory
Specialized accounting firms can assist with the above. As we have indicated, the application of regulations when it comes to withholding tax (WHT) in the Pay and Refund mechanism is not an easy task. It is a complex process that requires a lot of time, energy, and resources.
getsix® experts provide advice on the application of withholding tax settlements and existing procedures for withholding tax exemptions and refunds procedures, including the Pay and Refund mechanism.
Learn more about getsix® tax advisory services: Tax Services in Poland.
If you have any further questions or require additional information, please contact your business relationship person or use the enquiry form on the HLB Poland website.
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