Facilitating the exemption of dividends from withholding tax

Key clarifications in the ruling

1. Taxation in the country of residence
   To benefit from the withholding tax exemption, the entity receiving income from dividends in Poland must be subject to unlimited tax liability in an EU or EEA member state. Importantly, this requirement is considered fulfilled even if the dividend recipient has not paid tax in its country of residence, for example, due to losses offset against the tax base.
2. Exemption applicable to a specific type of income
   The withholding tax exemption does not apply to companies that benefit from tax exemptions in their country of residence, i.e., those that are not subject to taxation at all. However, the Minister of Finance confirmed that the exemption from taxation of dividends in the member state of the dividend-receiving company does not breach the conditions for applying the withholding tax exemption in Poland.
3. Avoidance of double taxation
   The Minister of Finance emphasized that the aim of the regulations is to prevent situations in which dividends distributed within holding structures are subject to multiple levels of taxation. At the same time, the ruling highlights the necessity of addressing cases where income remains entirely untaxed.
4. Potential intensified scrutiny of transactions by tax authorities
   The Minister of Finance also noted that, for instance, if the recipient of dividends has not paid tax in its country of residence due to the utilization of tax losses or the transfer of profits within chains of entities, tax authorities may undertake actions to verify whether the withholding tax exemption was used to circumvent tax law.

Significance of the ruling for taxpayers

The general tax ruling by the Minister of Finance represents a favorable development for entities distributing dividends to companies domiciled within the EU or EEA. It allows the use of the withholding tax exemption in cases where the dividend is not taxed at the level of the recipient company, as well as in situations where the recipient entity has not paid tax in its country of residence in a given tax year, for example, due to offsetting prior years’ losses against the tax base. Previously, in such scenarios, tax authorities often denied taxpayers the right to apply the withholding tax exemption on distributed dividends.

Although the general ruling does not constitute a source of law, it is expected to influence the interpretative practices of tax authorities. Taxpayers who adhere to the ruling's content will benefit from protection against the consequences of potentially divergent decisions by individual tax authorities.

The general ruling does not exempt taxpayers making payments to related entities exceeding PLN 2 million in a tax year from the obligation to withhold tax on the excess amount or to obtain an opinion on the application of the withholding tax preference or submit a declaration by a designated management board member confirming compliance with all conditions for applying the exemption. The ruling also does not affect the obligation of the entity distributing the dividend to gather the necessary documentation to verify the right to apply the withholding tax exemption.

Should you have any questions, please do not hesitate to contact Forvis Mazars' Tax Advisory Department.