WHT: Obligation to use the "pay and refund" mechanism and the opinion on the application of preferences

From the article you will learn:

• How the "pay and refund" mechanism works?
• Why it is worth submitting an application for an opinion on the application of withholding tax preferences?
• Does obtaining an opinion on the use of preferences allow you to apply preferences for each payment?

From 1 January 2022, payers are obliged to use the "pay and refund" mechanism. This mechanism applies if the total amount of receivables paid from passive sources indicated in Art. 21 section 1 point 1 and art. 22 section 1 of the CIT Act (e.g. interest, license fees, dividends), subject to withholding tax (WHT), exceeded the total amount of PLN 2,000,000 in the tax year applicable to the payer paying these receivables, and the payments were made to the same taxpayer – foreign related entity.

In such a case, the payer is obliged to collect tax, at the rate specified in the Act, on the amount above PLN 2,000,000, and they must do so even if they have the right under a double taxation avoidance agreement to apply a lower tax rate or exemption from WHT. 

Only after fulfilling this obligation (if the payer has the necessary documents) can the payer apply to the tax authorities for a refund of the overpaid tax. 

This creates many complications, so many entities are looking for ways to use their reliefs in a less "circuitous" way.

How to take advantage of the reduced tax rate without using the "pay and refund" mechanism?

One way to avoid the obligation to use the "pay and refund" mechanism is to submit an application for an opinion on the application of preferences. This document constitutes a kind of confirmation of the taxpayer's right to apply withholding tax preferences (in the form of an exemption or reduced rate resulting from the double taxation avoidance agreement) and enables the use of this preference without the need to use the "pay and refund" mechanism.

As a rule, the opinion is valid for 36 months from its issuance, unless the actual circumstances change significantly during this time, which may affect the fulfillment of the conditions for using the exemption or reduced tax rate.

However, we would like to point out that the tax authorities limit the scope of validity of the opinion only to receivables that will be paid on the basis of contracts and documents delivered to the authority together with the application for an opinion on the application of preferences. 

This approach does not result from the provisions of the CIT Act. Article 26b section 1 of the CIT Act, regulating issues related to the opinion and its issuance, indicates that the tax authority issues an opinion on the possibility of applying an exemption or a lower tax rate resulting from the relevant double taxation avoidance agreement, if the application demonstrates the fulfillment of the conditions for its application. 

However, the provision does not provide for the requirement to present the document on the basis of which the payment is made.

Can the tax office demand payment of tax despite having the opinion on the application of preferences? 

The approach of the Polish tax authorities means that in the case of taking out new loans or concluding new license agreements, which could not necessarily be presented together with the application for an opinion on the application of preferences, the opinion held may not be sufficient, due to which the payer will be obliged to apply the "pay and refund" mechanism in relation to these payments. 

In our opinion, this approach of the tax authority is incorrect. If you are interested in submitting an application for an opinion or you have one, but e.g. you intend to conclude new loan agreements, please contact us in order to secure your tax position.