According to the “look-through approach” tax principle, a Polish company paying a dividend to a foreign company, which is not the actual beneficiary of the payment, may apply a favorable tax rate or even abstain from withholding tax at the source, provided that a bilateral agreement with the state of the actual dividend recipient’s domicile allows for this. However, in order to apply this rule, requirements set out in the CIT (Corporate Income Tax) Act must be met.
Exemption from Withholding Tax or Application of a Lower Tax Rate
Business entities not based or managed in Poland are only liable for tax on incomes generated within Poland. According to the provisions of Art. 21(1) and Art. 22(1) of the Corporate Income Tax Act, dividends paid to such foreign companies, as well as certain other incomes, e.g., from interest or licenses, are subject to a 20% or 19% tax rate. The entities responsible for withholding this tax are the businesses or companies making these income payments at the time of payout. Yet, as per Art. 22(4) in conjunction with Art. 26(1), 1c, and 1f of the CIT Act, the so-called withholding tax (WHT) can be either not collected or collected at a rate determined by the relevant double taxation avoidance agreement.
A Limited Partnership with Foreign Participation in a Corporate Holding
Based on the aforementioned provisions, a Polish limited partnership, when paying a dividend to a foreign company that merely acts as an intermediary in forwarding the payment to its actual beneficiary, wanted to refrain from withholding tax by following the look-through approach. The general partner was German company “A” holding 0.01% of shares, while the limited partner was another German company “B”, holding 99.99% shares in the limited partnership and 100% shares in company “A”. The Polish company paid dividends to company “B”, which then transferred the entire amount to the top-tier company “C” based in Germany.
The limited partnership sought confirmation from the Director of the National Revenue Information that under the given circumstances, it would be exempt from withholding tax on the dividend payout. According to Art. 22(4) of the CIT Act, incomes from corporate profit shares are exempted from taxation when the dividend payer is a company based or managed in Poland, and the income recipient is a company taxable in Poland or another EU or EEA country on its entire income, regardless of where it’s earned. Another essential condition is that the dividend-receiving company should directly hold at least 10% of shares (stocks) in the dividend-paying company and should not benefit from a total exemption from income tax. These conditions were also met in this case.
The Actual Beneficiary of the Dividend Must be a Direct Shareholder of the Payout Company
In the tax interpretation issued on August 21, 2023, the Director of National Revenue Information stated that the company couldn’t avail the exemption, as the “look-through approach” was not applicable in this case. The German company, which is the actual dividend recipient, is not a direct shareholder of the dividend-paying company. Hence, the condition mentioned in Art. 22(4) of the CIT Act, requiring the dividend beneficiary to have at least a 10% share in the dividend-paying company’s capital, wasn’t met. According to the authority, the foreign company “C” holding 99.99% of shares in company “B”, merely acting as the intermediary in transferring the dividend, does not fulfill this requirement (individual interpretation 0111-KDWB.4010.28.2023.2.KKM, publication date August 28, 2023).
Direct Shareholding Requirement
To benefit from the WHT exemption on dividend payouts, Polish companies must remember the direct shareholding condition for the actual beneficiary of the payment. As per the current verdict of the Provincial Administrative Court in Wrocław from February 3, 2015 (ref. no. I SA/Wr 2372/14), the term “directly” in Art. 22(3) point 3 of the CIT Act refers to holding not less than 10% of shares (stocks) in the capital of the dividend-paying company. This term should be understood as holding these shares outright and not indirectly through other legal entities. In the discussed case, the company would be eligible for the exemption if either company “B” was the actual beneficiary of the paid dividend, or if company “C” held at least 10% shares in the Polish limited partnership.
Author: Robert Nogacki, Legal Advisor, Managing Partner, Skarbiec Law Firm, specializing in legal, tax, and strategic consultancy for businesses.
