The payment of profits from a Polish company to a foreign owner appears to be an activity that will not cause many complications. And indeed it is, until this benefit is taxed.
In Poland, the payment of dividends to a domestic owner (shareholder) of a company is subject to a 19% CIT tax. In most cases, the dividend tax is paid by the company making the payment, so the beneficiary simply receives the dividend minus the income tax.
In international transactions, matters become somewhat more complicated. The CIT Act provides for the possibility of applying a local exemption for dividend payments to entities from EU Member States, the European Economic Area and the Swiss Confederation. In this case, dividend payments, e.g. to a shareholder from the United Kingdom, will not benefit from this specific exemption.
Apart from Polish CIT regulations, dividend payments, including interim dividends, should also be considered on the basis of the relevant double taxation agreement (DTT). Individual DTTs have different provisions regarding preferential rates for dividends paid abroad and even exemptions.
Option one – the Polish company has no choice but to collect withholding tax (WHT) and pay the amount due minus 19% tax. Later, the Polish company or foreign shareholder may apply for a refund of this tax, but the issue of refunds will be discussed in another post.
Option two – the Polish company pays dividends to a company subject to income tax in Poland or in a Member State of the European Union other than Poland or in another country belonging to the European Economic Area on its total income, regardless of where it is earned. Non-collection of tax on the basis of an exemption is possible provided that the registered office of the company receiving the dividend is documented by its certificate of residence.
Option three – a Polish company pays dividends to an entity subject to income tax on its total income, regardless of where it is earned, in a country with which Poland has a DTT (exemption or preferential tax rate). The application of the tax rate resulting from the relevant DTT or non-collection of tax on the basis of the DTT is possible provided that the taxpayer’s registered office for tax purposes is documented by a certificate of residence obtained from the taxpayer.
In practice, but also in accordance with Polish regulations, only the payment of dividends with full tax collection will not create additional barriers.
Problems arise when a Polish company paying dividends wishes to apply an exemption from the Polish CIT Act or a tax rate resulting from the relevant DTT, or not to collect tax in accordance with the DTT.
In addition to holding a certificate of residence, the Polish company will have to exercise due diligence in verifying the conditions for applying a tax rate other than 19%, exemptions or conditions for not collecting tax, resulting from specific regulations or double taxation agreements. This means, among other things, that it must examine the status of the actual owner of the receivables and obtain the necessary statements in this regard from the partner (shareholder). In the course of an audit, the tax authorities may assess whether due diligence has been exercised, taking into account the nature and scale of the activities carried out by the Polish company paying the dividend and its links with the beneficiary of the dividend.
If a taxpayer paying dividends to a foreign company wants to take advantage of the exemption under the Polish CIT Act or the DTT (or a tax rate other than 19% under the DTT), has exercised due diligence in verifying the applicability of the exemption, has collected all the necessary documents, including the certificate of residence of the partner (shareholder), can they safely apply the lower rate, the exemption?
Yes – but only up to the payment limit of PLN 2,000,000. According to the Polish CIT Act, if the total amount of payments made to the same (even domestic) entity related to dividends and other benefits subject to WHT (interest, copyrights, etc.) exceeded PLN 2,000,000 in the tax year applicable to the payer of these amounts, then on the date of payment, it is not possible to refrain from collecting WHT on the excess over PLN 2,000,000 on the basis of the relevant double taxation agreement, and without taking into account exemptions or rates resulting from specific provisions or double tax treaty.
No – even if the limit of PLN 2,000,000 per year for payments to a related entity is exceeded, there are ways to take advantage of the WHT exemption for dividends under the Polish CIT Act or the preference under the relevant DTT. However, such solutions involve additional obligations and verification on a case-by-case basis.
If you would like to learn more about WHT-covered payments from Polish companies to foreign related entities, or if you have any other doubts or questions related to this issue, feel free to contact us.
