Another ruling by the Minister of Finance regarding exemption from withholding tax

On November 20, 2024, the Minister of Finance has issued another general ruling (ref: DD9.8202.2.2024), which concerns the application of the withholding tax exemption, this time on non-residents' income earned from interest and royalties. The ruling is intended to harmonise the practice of tax authorities in the application of the regulations and to clarify certain conditions that must be met for such an exemption to be applied.

Key issues contained in the ruling

The first key issue raised in the ruling concerns the condition of being subject to taxation in the country of residence by the recipient of the payment. The Minister of Finance stressed that in order to apply the withholding tax exemption in Poland, an entity earning income from interest or royalties must be subject to unlimited tax liability in its country of residence, which is a member of the European Union or the European Economic Area. This condition means that the income of such an entity should be subject to taxation regardless of where it is earned. Importantly, the condition of taxability is also considered to be met in a situation where the taxpayer has actually not paid income tax in his country of residence, for example due to incurring tax losses that could have been deducted from the tax base.

The second key issue raised in the ruling concerns the condition of not using the exemption from taxation in the country of residence by the recipient of the payment. The Minister of Finance indicated that the exemption from withholding tax in Poland will not be available to an entity that benefits from a total exemption from income tax in its country of residence or exemption from certain categories of income, such as interest or royalties. The exception is situations in which the non-payment of tax is due to individual circumstances, such as the settlement of tax losses, which does not mean the use of a formal tax exemption.

The Minister of Finance emphasized that the purpose of the regulations is to ensure that income from interest and royalties is taxed once, in the country of residence of the recipient of the income. However, a situation in which the recipient of income did not pay the tax for reasons related to his individual tax situation, such as settling losses from previous years, does not exclude the possibility of applying the withholding tax exemption in Poland.

The Minister of Finance also pointed out that in situations where income from interest or royalties remains untaxed in the recipient's country of residence, the tax authorities may examine whether the transaction was an attempt to avoid taxation.

The importance of the ruling for taxpayers

The general ruling of the Minister of Finance has significant practical consequences for entities paying interest and royalties to companies based in the EU or EEA. It seems that the crucial conclusion is that the withholding tax exemption in Poland may also be applied in situations where the recipient of the payment in his country of residence has actually not paid the tax, as long as this results from individual circumstances, such as deduction of tax losses. If, on the other hand, the lack of effective taxation of interest or royalties in the recipient's country of residence results from the use of a tax exemption applicable to this type of payment, then the interest or royalties should be subject to withholding tax.

A general ruling, although it is not a source of law, should nevertheless affect the interpretative practice of tax authorities. Taxpayers who comply with the ruling will be protected against the effects of any different decisions of tax authorities.

However, the general ruling does not exempt taxpayers making payments to related entities with a value exceeding PLN 2 million in a tax year from the obligation to collect tax on the excess over the amount of PLN 2 million or to obtain an opinion on the application of withholding tax preferences or to submit a statement by an appointed member of the management board on meeting all the conditions for the application of the tax exemption. The ruling also does not affect the obligation of the entity making the payment to collect the necessary documentation in order 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.