WHT and opinion on the application of preferences in withholding tax – practical aspects of applying

This article answers the following questions:

• What conditions must be met to gain tax benefits arising from an opinion on the application of preferences?
• What is the step by step procedure for obtaining on opinion to simplify WHT affairs?

An opinion on the application of preferences allows taxpayers to take advantage of preferences in withholding tax without using the "pay and refund" mechanism. This solution is particularly beneficial for entities which make frequent payments to related entities with their seat abroad. What does the process of applying for an opinion in Poland look like in practice? Is it easy to meet formal requirements of the application and obtain a positive opinion?

How do you apply for a binding opinion on the application of preferences?

In order to obtain an opinion on the application of preferences, it is necessary to file a relevant application. 

The application is made in electronic form, via the schema available at the Public Information Bulletin (Polish: Biuletyn Informacji Publicznej) (which is found on the web page of the office of the minister in charge of state finances). 

It means that in order to take advantage of WHT preferences without using the pay & refund mechanism, we should make such an application by filling out and submitting a relevant form to the Lubelski Tax Office. The type of form used for the application depends on the type of the applying entity. 

If the application is made by:

• a remitter – the proper form is WH-WOP,
• a taxpayer – the proper form is WH-WOZ,
• a disbursing entity through entities maintaining securities accounts or omnibus accounts – the proper form is WHWOE.

Up to 2024, there had been two methods of submitting the form: via the web page of the Ministry of Finance in .xml format or as a .pdf document. As from January 2024, the only option is to fill out the form available at the web page of the Ministry of Finance.

Remember that the same method applies if we would like to supplement the application with further information to be presented to the tax authorities as well as to submit supporting documentation. 

What information must be given in an application for an opinion? 

Information which must be provided in the application for an opinion on the application of preferences differs depending on the type of the application (although the differences are rather subtle).

We need to provide quite basic information concerning the remitter, taxpayer, and subject-matter of the application. We enter the following data:

• purpose and place of applying,
• identification data of the remitter/taxpayer/issuer/disbursing entity through entities maintaining securities accounts or omnibus accounts,
• content of the application,
• substantiation of the application,
• contact details,
• information on the attached copies of documents,
• declaration stating that the facts presented in the application for an opinion on the application of preferences are true, and that the documents attached to the application are true copies of the originals.

What documents must be attached to the application for an opinion on the application of preferences?

The CIT Act does not specify a list of documents which need to be attached to the application. In previous years, the tax authorities deemed very basic documents concerning a particular taxpayer as sufficient. These were:

• valid certificate of tax residency,
• excerpt from the register of entrepreneurs relevant for the taxpayer,
• banking document confirming that the taxpayer has a bank account in the country of residence,
• taxpayer's declaration on having a beneficial owner status,
• articles of association,
• balance sheet, 
• loan/licensing agreement (in the case of payment of interest or royalties). 

Unfortunately, the Lubelski Tax Office has taken a stricter approach to such applications recently. The number of documents necessary to verify whether a taxpayer has the right to take advantage of withholding tax preferences (including documents confirming that the taxpayer actually conducts business activity) demanded by this authority has increased substantially. Importantly, any documents drawn up in a foreign language must be translated into Polish. For official documents, a certified translation is required. 

How to substantiate the application for an opinion?

In the application for an opinion on the application of preferences, the applying entity must demonstrate that it fulfils the requirements for qualifying for the exemption under the CIT Act (as set out in Article 21(3) and Article 22(4) of the CIT Act) or the requirements to apply the provisions of a double tax avoidance agreeement. 

In practice, to substantiate the application, it is necessary to present proper arguments for fulfiling each of the requirements for applying preferences, and to support these arguments with relevant documents.  

Are the tax authorities willing to issue opinions?

Up until recently, the Lubelski Tax Office had issued opinions on the application of preferences without much reservation. Lately, however, there has been an increase in rejected applications to issue an opinion on the application of preferences with respect to the exemptions under the CIT Act. This stems from the harsher approach of the tax authorities as well as from the fact that the administrative courts (both the Provincial Administrative Court in Lublin and the Supreme Administrative Court) generally agree with the tax authorities on this matter. 

The tax authorities typically reject to issue an opinion on the following grounds:

• failure to meet the requirements,
  • being subject to tax and not enjoying exemption from income tax on the entire income regardless of source (as, according to the authorities, the entity is in fact not subject to effective taxation),
  • having the status of the beneficial owner of the payments received,
• existence of reasonable doubts as to the accuracy of the taxpayer's declaration on being the beneficial owner,
• existence of a reasonable assumption that the taxpayer does not actually conduct business activity in the country of residence. 

The requirement of being subject to tax and not enjoying exemption from tax has only been recently deemed by the tax authorities as being subject to effective taxation. Unfortunately, the administrative courts have begun to agree with this interpretation, as demonstrated by e.g. judgment of the Supreme Administrative Court of 19 December 2023, file no. II FSK 27/23. In this judgment, the Supreme Administative Court ruled that if a taxpayer has not declared paid income tax throughout several years, then there is reasonable doubt as to whether the requirement of effective taxation is actually fulfiled. 

In its judgments of 19 December 2023 (file no. II FSK 27/23, II FSK 28/23 and II FSK 29/23), the Supreme Administrative Court also agreed with the rigorous standpoint adopted by the tax authorities concerning the requirements for treating an entity as the beneficial owner. 

It is indicated that an entity that receives payments does not conduct actual business activity in the country of residence if:

• it does not have employees,
• its seat is at the same address as other group entities,
• it obtains capital gains which are disproportionate to its income from operating activity,
• it transfers all or almost all the payments to a shareholder,
• it has the same management board members as other group entities,

among other premises. 

Unfortunately, such an approach may cause problems with obtaining an opinion on the application of preferences mostly by holding companies, in particular those with their seat in the Netherlands, Luxembourg, or Cyprus.   

It should also be remembered that, in case of payment of dividends, despite the fact that Article 22(4) of the CIT Act does not provide for having the beneficial owner status by a taxpayer as a requirement, in order to enjoy the exemption, this requirement must be fulfiled. As stated by the tax authorities (and, unfortunately, more frequently by the administrative courts as well), verification of the beneficial owner status is necessary to exercise due diligence. 

Is it possible to obtain an opinion without the support of a tax advisor?

Taking into account the standpoint of the tax authorities, recent decisions of the administrative courts, and our experience, obtaining an opinion without the support of a professional tax advisor may be significantly difficult. A tax advisor helps you to draw up and substantiate the application and determine which documents to attach. 

Those entities which make payments to holding companies should especially consider the support, as they are among the most adversely affected by the rigorous approach of the authorities.