WHT relief for holding companies: How and when can they be applied?
20 June 2024
Preferential rules for taxing dividends and other income of holding companies in Poland and in the European Union are intended to support holding activities and avoid double taxation. In practice however, it is becoming increasingly difficult to benefit from WHT relief for holding companies in Poland. Why and when can they be applied? What advantages and disadvantages do they bring? Here you will find the most important rules and the latest case law on withholding tax relief for holding companies.
Withholding tax (WHT) benefits for holding companies in Poland and the EU are primarily intended to facilitate cross-border business activities. However, to benefit from these advantages, including the avoidance of double taxation, companies must meet certain conditions and undergo appropriate audit procedures.
WHT relief for holding companies: Assumptions
The Council Directive 2011/96/EU on the common system of taxation applicable to parent companies and subsidiaries of different EU member states aims to eliminate double taxation of dividends and other profits (e.g., interest) paid by subsidiaries to parent companies in the EU. The main rules are:
- Exemption from Withholding Tax – Dividends paid by a subsidiary to a parent company in another EU member state may be exempt from withholding tax;
- Exemption from Corporate Income Tax (CIT) – Income received by the parent company from dividends from a subsidiary may be exempt from CIT in the country in which the parent company is based
WHT benefits for holding companies: relief or trap?
WHT benefits for holding companies can be both a relief and a trap. Many companies in Poland have already experienced this. The main benefits for holding companies using WHT benefits include:
- Reduced tax rates – Holding companies can benefit from reduced withholding tax rates on dividends and interest due to double taxation agreements (DTAs) or national regulations.
- Profit consolidation – Holding companies can consolidate profits from various subsidiaries.
- Avoidance of double taxation – This applies to the same income in tax jurisdictions of different countries.
The risks associated with applying WHT reliefs to holding companies include:
- Abuse of benefits and the associated restriction of their application by states – Holding companies may abuse the provisions, which is why EU member states are introducing more and more restrictions and regulations to prevent such practices. This often leads to the opposite effects and unexpected additional tax burdens.
- Complexity ofregulations – Documentation and compliance requirements are complex and time-consuming.
- Need to prove the actual right to apply the benefits – This is the responsibility of the holding companies and may involve additional difficulties.
- Changing regulations – EU member states are adapting the withholding tax benefits for holding companies to national rules, resulting in differences in procedures and tax settlements in each target country.
WHT Relief for Holding Companies in Poland
Polish national regulations on withholding tax provide for an exemption from withholding tax. According to the Corporate Income Tax (CIT) Act, dividends paid by a subsidiary to a parent company based in Poland or another EU country may be exempt from WHT, provided that certain conditions are met:
- The dividend-paying company must have its headquarters or management in Poland.
- The income (revenue) recipient from dividends must be a company subject to corporate income tax in Poland, another EU Member State, or EEA State on all its income, regardless of where it is earned.
- The company referred to in 2. must directly hold at least 10% of the shares (stocks) in the capital of the company referred to in 1.
- The company referred to in 2. does not benefit from income tax exemption on all its income, regardless of the source.
- The company receiving income (revenue) from dividends must hold at least 10% of the shares in the distributing company for at least two consecutive years.
In addition, the “pay and refund” procedure is applied to some payments. If the total amount of royalties, interest, and dividends paid to the same foreign entity exceeds PLN 2 million in a tax year, the payer is obliged to collect withhold tax on the part exceeding this amount. Subsequently, WHT is withheld and, if the beneficiary is a resident of another country, a refund can be requested.
In order benefit from WHT relief, it is necessary to present a certificate of tax residency of the beneficiary in an EU Member State or a country with which Poland has a double taxation agreement.
Difficulties in applying WHT Relief for Holding Companies in Poland and the Latest Case Law of the Supreme Administrative Court
Both Polish payers and foreign holding companies face the challenges of how to proceed in case of application of the mandatory WHT tax mechanism – i.e., in Poland, for the above-mentioned payments exceeding PLN 2 million to the same taxpayer in a tax year.
This is because it is becoming increasingly difficult to apply for WHT reliefs for holding companies in Poland. This is confirmed by three negative rulings of the Supreme Administrative Court regarding the exemption from WHT on dividends paid by Polish companies to foreign holding companies (rulings of the Supreme Administrative Court of December 19, 2023, ref. II FSK 27/23, II FSK 28/23, II FSK 29/23).
With these rulings, the Supreme Administrative Court confirmed previous decisions of the Provincial Administrative Court in Lublin and decisions of the Head of the Lublin Tax Office (specializing in WHT matters) refusing to give an opinion on the application of WHT reliefs with regard to interest and dividends payments.
The Reason for this – according to the Polish authorities – was legitimate doubts about the actual ownership status of the recipients of such income due to the lack of actual business activity in the country of residence, as well as the suspicion that Article 22c of the CIT Act might apply, which excludes the possibility of a WHT exemption if one of the main objectives of a particular transaction or activity is to benefit from the withholding tax exemption and the approach is artificial.
The Supreme Administrative Court thus confirmed that the provisions of Article 26b, paragraph 3, point 2 of the CIT Act, are applied very strictly in the case of withholding tax reliefs for holding companies. These provisions provide that an opinion on the application of preferences is rejected in the following cases:
- The taxpayer does not meet the conditions of exemption of benefits under double taxation agreements set out in the CIT Act.
- There are reasonable doubts about the accuracy of the documents or the taxpayer’s declaration that they are the actual owner of the income.
- There is reasonable suspicion of tax avoidance activities.
- There are reasonable grounds to believe that the taxpayer (foreign company) does not actually carry out business activities in the country of tax residence.
The position of the Supreme Administrative Court confirms the reluctance of the authorities to issue opinions on the application of WHT benefits by issuing refusal decisions. In the case of holding companies, it might be reasonable to think about changing the accounting model and alternative models of distributing funds or, for example, conducting business directly in Poland.
WHT relief for holding companies: Benefit from professional advice
If you have any doubts about applying of WHT relief for holding companies, experienced getsix® experts can help you assess the tax implications for a specific company and assist in choosing the best methos for applying WHT.
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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