Beacons of light in the gloomy withholding tax situation in Poland

Wojciech Marszałkowski
Wardyński & Partners, Warsaw

wojciech.marszalkowski@wardynski.com.pl

Several recent judgments in Poland could pave the way for a predictable and investor-friendly withholding tax system. The Ministry of Finance has promised to provide guidance on the application of withholding tax, which aims to address the most pressing challenges. Until then, we need to make the most of existing tax practices related to the ruling or try alternatives, as the investor and the borrowers did in the relevant cases.

The turbulent evolution of withholding tax rules continues to be one of the key elements in the debate on foreign investments in Poland, both past and future. The tax reform initiated in 2019 drifts on and a steady stream of tax disputes continues to flow from the tax offices to the courts.

The tax reform concerning the withholding tax rules, which began six years ago, has not yet been completed. It initially shifted the default manner of applying withholding tax exemptions and reduced tax treaty rates from ‘relief at source’ to ‘pay and refund’, leaving taxpayers and tax remitters with inefficient alternatives. The gravity of this change is amplified by the fact that Poland imposes withholding tax on various income streams, including dividends, interest and royalties. The reform has also placed a heavy burden on tax remitters, who are obliged to examine the corporate structures according to which they distribute/through which they remit monies. Over time, the application of law has been deferred, laws have been slightly modified and official ministerial guidelines have not progressed beyond the draft stage. The status quo is that tax remitters and tax authorities continue to argue over the interpretation of fundamental and seemingly non-contentious provisions.

The tax reform in Poland coincided with the Court of Justice of the European Union’s (CJEU) ruling in joined cases C-115/16, C-118/16, C-119/16 and C-299/16. These rulings added fuel to the situation in terms of audits covering the correctness of the application of the participation exemption and tax treaty benefits, with a particular focus on structures involving a holding company based in Luxembourg or the Netherlands and an indirect shareholder based outside the EU.

The new laws and their interpretation affect virtually all passive income flowing out of Poland. This has resulted in a steady, high number of cases being heard by the administrative courts, which handle cases resulting from audits covering open tax years and complaints from taxpayers and tax remitters dissatisfied with how tax offices have assessed their right to reduce their withholding tax in the future.

The pursuit of certainty

Tax consequences need to be taken into account when evaluating the financial effectiveness of an investment. Investors financing projects in Poland need to know which financing structures lead to predictable (and preferably favourable) tax treatment.

Guidance is sought in areas such as tax treaty eligibility, the availability of specific tax treaty benefits, the application of exemptions governed by domestic law, as inspired by the EU’s Parent-Subsidiary Directive (Council Directive 2011/96/EU) and Interest and Royalties Directive (Council Directive 2003/49/EC) , as well as tax exemptions applicable to investment funds.

Polish tax law envisages an accessible and relatively fast individual tax ruling procedure, under which tax authorities address various taxpayers’ and tax remitters’ substantive questions on withholding taxation in Poland.

Recent case law involving a Luxembourg seated SCA SICAV-RAIF

Background

Earlier this year, three province administrative courts heard four precedent-setting withholding tax cases (I SA/Kr 1157/23, I SA/Gd 1097/23, III SA/Wa 2765/23 and III SA/Wa 2766/23). They all involved an interest-bearing loan granted by a Luxembourg seated SCA (a partnership limited by shares known as a SCA or SECA) SICAV (a collective investment scheme or société d'investissement à capital variable)-RAIF to Polish borrowers. The courts ruled in favour of the latter and confirmed that the SCA SICAV-RAIF is eligible for a domestic withholding tax exemption for selected payments to close-end collective investment institutions located within the EU.

An SCA SICAV-RAIF is a partnership limited by shares, an investment entity with variable capital and a reserved alternative investment fund managed by authorised alternative investment fund managers (authorised AIFMs). These structures are generally compliant with the EU Directive on Alternative Investment Fund Managers (Commission Directive 2011/61/EU). In this specific case, the lender identified itself as a single corporate taxpayer, together with its sub-funds in Luxembourg, and as a resident in Luxembourg for the purposes of the applicable tax treaty.

The borrowers, Polish corporations not related to the lender, acting as tax remitters with regard to the interest they distribute, were obliged to calculate, collect and pay the withholding tax to the relevant tax office, unless they held a set of documents confirming that the SCA SICAV-RAIF was eligible for the tax exemption applicable to collective investment institutions.

Eligibility for the exemption

When checking whether the tax exemption criteria specified in the Polish Corporate Income Tax Act had been met, the Polish tax remitters established that:

• the fund is a closed-end investment fund subject to income taxation in Luxembourg and is exempt from tax on income derived from securities in risk capital;
• the fund’s activity requires notification to the authority supervising the financial market in Luxembourg (Commission de Surveillance du Secteur Financier or CSSF);
• the fund has a depositary that keeps the assets, records thereof and monitors the fund’s cash flow;
• the fund is managed by an entity registered and licensed in Luxembourg (authorised AIFM);
• the fund’s exclusive subject of activity is the collective location of monetary funds in securities, money market instruments and/or other proprietary rights (eg, loan receivables); and
• the CSSF supervises the activity of the authorised AIFM, which is legally obliged to ensure the fund’s compliance with certain rules.

During the tax ruling procedure, the tax remitters requested an opinion on whether the above was sufficient to benefit from the tax exemption. The tax authority ruled that the supervision over the authorised AIFM was insufficient and the condition related to the tax exemption was that the CSSF must ‘directly supervise’ the fund’s activity.

Dissatisfied with the tax ruling, the tax remitters filed a complaint with the courts.

The judgment

The courts held that despite the wording of the law, the fund is similar enough to Polish closed-end collective investment institutions to benefit from the tax exemption. Subsequently, the tax remitters are not obliged to calculate, collect and pay withholding tax to the tax office.

The courts found that the conditions of the exemption should be interpreted in the context of the equal treatment of Polish investment funds and their counterparts in the EU. They held that compliance of Polish law with the principle of free movement of capital and freedom to establish and provide services should be presumed.

The courts found that the law is meant to guarantee that every collective investment institution from another EU Member State, whose purpose and fundamental principles of operations match Polish investment funds, should benefit from the tax exemption. It follows that differences in the legal frameworks within the bloc should not determine the tax assessment, as long as the purpose of the regulation is fulfilled.

The courts further explained that as long as the authorised AIFM supervised by the CSSF is responsible for the fund’s compliance with the law, effective supervision should be considered equivalent to direct supervision over the fund’s activity, as required by Polish law. The CSSF has the power to ensure the fund’s compliance with the law, regardless of the fact that the manager is the supervised entity. The mere form of supervision does not change the situation.

The courts supported their decision by citing the legislative history of the regulation, which was meant to address the specific concerns relating to the discrimination of foreign investment funds.

Despite this uncontroversial reasoning, the tax authority filed cassation complaints against the judgments. The Supreme Administrative Court will hear the cases around the turn of 2025 and 2026.