This article will answer the following questions:

• How to become eligible for an exemption from the taxation of dividends in Poland?
• What does it mean that activities related to the payment of dividends must be of genuine nature?
• What is the purpose of the EU Parent Subsidiary Directive?

Good news for all those interested in exemptions from taxation of paid dividends! On 20 November 2024, the Minister of Finance published a general interpretation in the Official Journal of the Minister of Finance of 15 November 2024, no. DD9.8202.1.2024, on certain conditions for claiming the exemption set out in Art. 22 sec. 4 of the Corporate Income Tax Act.

The Ministry of Finance issued this general interpretation in connection with widespread interpretational doubts regarding the application of the conditions specified in Art. 22 sec. 4 of the CIT Act, point 2 and point 4 of this provision and – to the relief of many entities – the position it took turns out advantageous for taxpayers and withholding agents.

Problems with the interpretation of the provisions governing the taxation of dividends in Poland 

Please be reminded that in order to claim the exemption from taxation of dividends paid in Poland, the taxpayer must meet the conditions stipulated in Art. 22 sec. 4 of the CIT Act, namely:

1. company paying the dividends must have its registered office or management board in Poland,
2. the company receiving the dividend must be taxed in the territory of Poland (or another Member State of the European Union or the European Economic Area) on its entire income – regardless of where it is derived,
3. the company receiving the dividend must hold at least 10% of the shares in the equity of the company paying the dividends,
4. the company receiving the dividend cannot benefit from the exemption from taxation on its entire income – regardless of the source of its earning. 

The above conditions for claiming exemption from dividend taxation result from the implementation into the Polish legal system of the European Union Council Directive 90/435/EEC (the so-called Parent Subsidiary Directive).

Tax authorities, and primarily the Lublin Tax Office dealing with withholding tax (WHT), interpreted the conditions regarding the taxation of the entity receiving the dividend very strictly. A very common argument for refusing to issue an opinion on claiming preferences was, for example, a loss incurred by a foreign taxpayer or an exemption from taxation of income from dividends in the taxpayer's country of residence.

Since no uniform position has been developed by administrative courts in this respect either, the Polish Ministry of Finance noticed the need for a general interpretation.

Tax residence alone is sufficient to meet one of the conditions for the dividend exemption

The Minister of Finance indicated in the general interpretation that the condition stated in Art. 22 sec. 4 p. 2 of the CIT Act, the condition of "taxation with income tax on one’s entire income, regardless of where it is derived" is met when the entity that earns income from dividends in Poland is a company subject to unlimited tax liability in Poland or another country of the EU or EEA.

This means that it is sufficient for the entity receiving the dividend to be a tax resident in one of the EU or EEA countries.

How to understand the condition of not using the exemption from taxation of one’s entire income?

Under Art. 22 sec. 4 p. 4 of the CIT Act, the condition allowing to claim the exemption is that the company earning the revenues specified in this provision "does not use the exemption from taxation of its entire income, regardless of the source of its generation".

This condition raised numerous doubts as to its correct understanding and was usually interpreted to the detriment of taxpayers.

Importantly, in many EU Member States, dividends are exempt from taxation in the country of residence of the entity receiving the dividend (e.g. in the Netherlands). Practice shows that tax authorities have often questioned the right to exemption pursuant to the Directive or the CIT Act, invoking this very argument.

However, in the general interpretation, the Minister of Finance is of the opinion that the mere fact that the recipient of a dividend from another EU or EEA Member State enjoys – on the basis of the provisions implementing the Directive into national legislation – a tax exemption of an objective nature applicable to dividends does not violate the condition stated in Art. 22 sec. 4 point 4 of the CIT Act.

This is indeed a favourable position that can help resolve numerous disputes between taxpayers and withholding agents on the one side and tax authorities and administrative courts on the other.

The Minister of Finance also explained in his interpretation what circumstances do not indicate that the taxpayer benefits from the exemption from taxation of their entire income, within the meaning of Art. 22 sec. 4 p. 4 of the CIT Act.

Such a situation would be, for example, the lack of payment of income tax in a given tax year resulting from the individual situation of the taxpayer (e.g. settlement of a tax loss or obtaining income only from dividends). Tax authorities frequently did not take into account the exact circumstances of failure to pay tax, as they assumed that since the entity did not pay tax, it did not meet the condition for applying the exemption.

Importantly, the Minister of Finance also indicated that a situation that fails to affect the fulfilment of the condition referred to in Art. 22 sec. 4 p. 4 of the CIT Act is also the transfer of profits in a chain of entities in which the dividend is not taxed at least once within the EU or EEA, when its beneficial owner is a company with its registered office outside the EU or EEA, or an entity that does not meet the definition of a company under the Directive.

Presenting such a position may suggest that the transfer of a dividend paid by a Polish entity in a chain of entities does not result in the loss of the right to the exemption from dividend taxation – and consequently lead to the conclusion that one does not need to hold the status of the beneficial owner in order to be able to claim this exemption.

Activities related to the payment of a dividend must still be of a genuine nature

The Minister of Finance emphasised that dividend payments can still be examined and assessed from the perspective of Article 22c of the CIT Act.  

Article 22c of the CIT Act, on the exclusion of tax exemptions, eliminates the possibility of using them artificially – i.e. in situations where transactions are created solely to obtain tax benefits, and not for the purpose of carrying out effective, justified economic activities.

Therefore, if the main purpose of the action is to avoid taxation, and the transaction is artificial, the exemption cannot claimed. There is therefore a risk that since tax authorities will no longer be able to question the right to the exemption in the situations specified in the general interpretation, they will start to invoke the artificiality of the transaction.

The purpose of the Parent Subsidiary Directive is important

In the general interpretation on exemptions from taxation of dividends paid, the Minister of Finance refers primarily to the main assumptions of the EU directive implemented into the provisions of the CIT Act.

In the general interpretation, the Ministry of Finance indicates that the basic objective of the directive is to eliminate cases where the transfer of dividends between companies that are tax residents of an EU Member State or an EEA state would result in double or multiple taxation of such transferred profits (dividends) with income tax. It also emphasises that the objective of the directive is not to entirely eradicate the taxation of dividends but to have them taxed only once.

What next as to the clarification of doubts regarding WHT in Poland?

The latest general interpretation of the Minister of Finance is very advantageous for taxpayers and withholding agents. As a result, everyone – taxpayers and withholding agents, as well as tax authorities – will be able to apply the regulations unambiguously, which will contribute to a more transparent tax system.

The general interpretation may also put an end to these actions of tax authorities that resulted in limiting the right of taxpayers to claim the exemption from taxation of dividends. However, as we have already indicated, there is a risk that tax authorities will refer to Article 22c of the CIT Act and the artificiality of the transaction in order to deny entities the right to claim the exemption. It seems a good idea to hold off the celebration and take some time to see how the new general interpretation will actually affect the practice of tax authorities. 

According to information provided by the Ministry of Finance, work is still underway to prepare clarifications on withholding tax, which will cover the issues of the status of the beneficial owner and the so-called "look through approach". These, however, will not be published this year.