There is a draft clarification on WHT

The current draft of the Explanations is much shorter than the previous one (it is only 19 pages long, whereas the previous one was 39) and relates almost exclusively to the interpretation of the concept of beneficial owner for withholding tax purposes. A key element of the Explanations (and one of the most controversial) is the indication that the definition of beneficial owner regulated in the tax laws (PIT and CIT) should also be applied for the purpose of applying exemptions resulting from double taxation treaties and participation exemptions (Articles 21(3) and 22(4) of the CIT Act) – regardless of the literal content of the provisions.

According to the draft Explanations, the criterion of the actual owner should be examined not only in the case of application of the exemption under the PIT / CIT Act, but also in the case of any payment of a passive nature (dividends, interest, royalties) to which the provisions of the DTC apply – and this regardless of whether the criterion of the actual owner has been literalised therein for a given type of payment.

The explanations outline a number of criteria designed to allow an assessment of whether an entity meets the criteria to be considered as having the status of a beneficial owner. For example, if an entity has its residence in a country ranking high on the list of foreign direct investments in the territory of Poland, mainly due to cross-border financial payments rather than trade or production activities, and at the same time there is no commensurability between the size of the GDP of this country and the scale of investments carried out from its territory, such a situation should raise doubts as to whether the recipient meets the prerequisite of receiving a given receivable for its own benefit (e.g. holding companies based in Luxembourg, Cyprus, and potentially also the Netherlands should raise doubts).

Equally importantly, the draft Explanatory Notes significantly narrow the applicability of the look-through approach (the extent of the limitation is, however, so far difficult to determine due to the lack of precision of the document). In practice, the only favourable issue confirmed by the draft Explanations is the possibility for the recipient of dividends to benefit from itemised exemptions of certain income it earns (which has been questioned in recent administrative court rulings) – although this issue too, due to the lack of precision of the Explanations, may be questioned.

Given that the draft Explanations are in line with current trends in tax administration activities and unofficial statements of the Ministry of Finance, we do not expect revolutionary changes to be made to the document. Given the importance of the document for practice, we recommend reviewing the current structures for their compliance with the criteria in the published document (as well as in the final version).