Dividend exemption only for beneficial owner – Supreme Administrative Court says
The new withholding tax rules, which effectively has come into force with the “Polish Deal”, have made tax settlement drastically more difficult for remitters. One of the biggest challenges is determining whether – and possibly how – tax should be withheld in the case of dividend payments to foreign parent companies. Unfortunately, a recent ruling by the Supreme Administrative Court (SAC) only widens fuss in this regard.
In some cases, companies paying certain amounts outside of Poland have to consider collecting withholding tax (WHT) on these payments. Until the end of 2018, however, WHT was mostly avoided. In the case of dividends, the tax exemption was subject to certain conditions (in most cases – the ‘”EU” status of the recipient and its holding of at least 10% of the capital of the paying company), but once these were met, it was sufficient to collect a certificate of residence and a declaration from the recipient of the dividend that the statutory conditions for exemption were met.
WHT on dividends – what is the problem?
Some complications began in 2019, when the CIT Act was supplemented with the definition of beneficial owner and the remitter’s due diligence obligation. However, despite the introduction of these regulations, mostly there were no “clash” with the tax authorities. The effective introduction of the new WHT regime in 2022 led to more serious complications. From now on, exceeding the limit of a payment of PLN 2 million to a single taxpayer in a tax year results in the need to withhold tax, and freeing oneself from this obligation is much more difficult than before, because since 2022 the remitter has two options for not collecting the tax – either based on an opinion on the exemption obtained from the tax office (and it is then the office that verifies the conditions for exemption), or based on a special WH-OSC statement submitted to the office by the head of the entity, in which he confirms that – in simple terms – the payments are entitled to tax exemption.
In this context, it is very important whether, in the case of a dividend payment, the remitter is obliged to examine whether the recipient of the dividend has the status of a “beneficial owner” (BO). The conditions for the application of the dividend exemption are set out in Article 22(4) to (6) of the CIT Act. Searching for reference to the status of the BO is pointless in these provisions – unlike in the case of a similar exemption concerning, i.a., interests and royalties listed in article 21 of the CIT Act. It might therefore seem that, precisely in the case of dividends, BO status is not required. On the other hand, Article 28b(4) of the CIT Act, concerning the attachments required for the application for a WHT refund collected under the pay and refund mechanism applicable to payments of interests, royalties and dividends, provides that a statement regarding the “beneficial owner” status of taxpayer is necessary. Moreover, the provisions relating to the WH-OSC statement referred to (until the end of 2022) to Article 28b(4) points 4-6, leading to the conclusion that the filing of the WH-OSC statement involves verification of the BO status of the recipient of the payment.
To sum up, the regulations of the CIT Act are contradictory and it is unclear whether beneficial owner status is required or not in the case of dividends. This is important because it may be difficult for the remitter to prove this status. There are various reasons for this, but the basic problem stems from the fact that the ownership of shares (stocks) is often held by holding companies – with limited assets and functions.
The SAC held that, although the legislator, implementing the provisions of the EU Directive did not explicitly mention verification of the beneficial owner status among the conditions for applying the exemption, the purpose of the Directive may only be fulfilled if the dividend goes to the beneficial owner. Consequently, it is incumbent on the remitter to verify the beneficial owner status of the taxpayer when paying the dividend. This ruling contradicts the previous judgment of the Supreme Administrative Court, which can be disappointing for those remitters who based the argumentation of their proceedings on the earlier ruling.
New standpoint of SAC
The discussed issue became the subject of a recent SAC ruling of 31 January 2023, ref. II FSK 1588/20. The case concerned a remitter’s complaint against an individual interpretation, in which the authority stated that the use of the dividend exemption requires verification of the BO status of the actual recipient of the receivables. The authority argued that the duty to exercise due diligence cannot cover only the verification of the conditions for the application of the dividend exemption, but also the existence of circumstances preventing from obtaining from taxpayer the statements referred to in Article 28b(4) points 4-6, i.e. that:
- he does not benefit from the tax exemption on all his income,
- he has a tax liability in respect of the payment received and is the beneficial owner of the payment,
- he conducts a real economic activity in the country of residence.
However, the Regional Administrative Court in Wrocław disagreed with the interpretation of the tax office and overruled the appealed interpretation. In its justification, the court of first instance pointed out that the provisions of Article 28b(4) do not condition the right to tax exemption, but affect the possibility of direct application of the tax exemption, if the remitter has knowledge that these conditions may not be met, e.g. due to the inability to obtain a statement from the recipient of the payment.
However, the tax authority appealed to the SAC, which in turn… overturned the judgment of the lower court. The SAC held that, although the legislator, implementing the provisions of the EU Directive into Article 22(4) of the CIT Act, did not explicitly mention verification of the BO status among the conditions for applying the exemption, the purpose of the Directive may only be fulfilled if the dividend goes to the beneficial owner- which the legislator included in the provisions concerning the WH-OSC statement. Consequently, it is incumbent on the remitter to verify the BO status of the taxpayer when paying the dividend. At the same time, as the SAC noted, the verification made by the remitter does not have to be equivalent to that made by the tax authority in the relevant proceedings.
This ruling contradicts the previous judgment of the SAC of 27 April 2021, ref. II FSK 240/21. This ruling may be surprising, but above all disappointing for those remitters who based the argumentation of their proceedings on the earlier ruling.
Which explanation should be followed?
Recent SAC ruling will be an important point of reference for remitters in the context of determining the status of the beneficial owner when paying dividends. Although neither the provisions of the CIT Act nor the EU Directive explicitly articulate such an obligation when applying the dividend exemption, such verification – in accordance with the latest SAC ruling – should take place – as a manifestation of due diligence referred to in Article 26(1) of the CIT Act. Despite how debatable the SAC’s reasoning may be, it will be replicated by the tax authorities without the slightest doubt.
Does a negative verification of the BO status of a receivable recipient eliminate the chances of applying the exemption? No. In such a situation, remitters may consider applying the so-called look-through approach and verify whether the beneficial owner condition is met by another entity in the group structure. In practice, however, any less obvious situation will raise serious doubts for them and with a high probability they will need to apply for an opinion from the tax authorities.