Poland
Marcin Rudnicki and Michal Niznik
KPMG
Poland
Marcin Rudnicki and Michal Niznik of KPMG discuss how foreign taxpayers could make a claim for a refund of withholding tax in Poland
During a financial crisis the importance of cash-flow improvement is even more obvious than in the times of economic prosperity. Companies review operations to search for potential tax refunds. One such area involves claims based on EU law, which was unknown in Central and Eastern Europe a few years ago. The newest opportunity refers to withholding taxes on income sourced in Poland.
The main idea behind it is the EU non-discrimination principle which prohibits member states from applying a different treatment to resident and non-resident taxpayers where both are in an objectively comparable situation. A net-basis taxation approach aims at eliminating such differences in withholding-tax treatment. In Poland, the discrimination challenge may be raised with respect to the taxation of outbound interest and royalties/service payments, or interest/royalty payments. Under domestic tax provisions outbound interest/royalty payments are subject to the final 20% withholding tax levied on a gross basis. Foreign taxpayers cannot offset their Polish tax liability with any direct or indirect expenses, whether incurred at source or elsewhere. The withholding tax rate may only be reduced based on a tax treaty or on an EU directive. Similar payments made in strictly domestic situations are not subject to any withholding tax. The income is taxed in the hands of the domestic recipient at a regular 19% tax rate on a net basis. This means that where a Polish resident company receives interest/royalty income from another resident entity it can reduce its tax liability by offsetting the income with business expenses.
Two companies receiving similar income from a Polish source are put in a different tax position based solely on the residence (nationality) factor. Consequently, a claim may be put forward that Polish tax legislation discriminates non-resident taxpayers and as such constitutes a restriction on the free movement of capital (article 56 of the EC Treaty) and the freedom to provide services (article 49 of the EC Treaty). The European Commission challenged the Polish provisions in 2007 and initiated an infringement procedure against country. In May 2009 the Commission issued a request for a reasoned opinion which so far remains unanswered by Poland.
Taxpayers resident in the EU that suffered withholding taxes in Poland with no possibility to use the foreign tax credit in their home state (either due to the exemption system or an excess credit position) should be able to claim refunds in Poland. Insofar as the claim relates to the free movement of capital principle it may also potentially be available for non-EU resident taxpayers.
Marcin Rudnicki (mrudnicki@kpmg.pl), is a partner and Michal Niznik (mniznik@kpmg.pl) is a manager at KPMG in Poland