The Director of National Revenue Information (“Authority”) has recently issued two private tax rulings regarding the availability of look-through approach with respect to use of Polish withholding tax exemption on dividends under Article 22(4) of the CIT Act. Both rulings are adverse.
According to the look-through approach, if the payee is found to be a mere intermediary, special treatment under national law or double tax treaty may still be available if the ultimate recipient further down the chain meets the relevant criteria as the beneficial owner of the payment (we are looking through the intermediary).
The ruling dated 3 Aug 2023, ref. 0111-KDIB1-2.4010.243.2023.1.DP, refers to a Polish dividend-paying company with two foreign companies as shareholders: (1) a Swiss joint stock company (60% holding in the Polish subsidiary), and (2) a German limited liability company (40% holding in the Polish subsidiary) that wholly-owns the Swiss company. According to the facts of the case, the Swiss entity (unlike the German one) is a holding company that does not carry on any operating activities. The Swiss company will not be a beneficial owner of the Polish dividends for the purposes of Article 4a(29) of the CIT Act. The dividends will be forwarded in whole to the German company. Given those facts, the applicant wanted to know if its verification of the right to WHT exemption pursuant to Article 22(4) of the CIT Act should be carried out in accordance with the look-through approach, i.e. by omitting the Swiss company. While the Authority agreed that the applicant should verify the right to WHT exemption in accordance with the look-through approach, it also said that the German company must meet all the exemption conditions under Article 22(4) to 22(4d) of the CIT Act in order for the exemption to apply. Ultimately, the Authority held that the German company did not satisfy the condition in Article 22(4d)(2), i.e. even though it does earn income from shares, it does not own them, and therefore denied the applicant the right to WHT exemption under Article 22(4) of the CIT Act with respect to the subject dividend.
The ruling dated 25 Aug 2023, ref. 0114-KDIP2-1.4010.292.2023.4.PP, involves a situation whereby a Polish company wanted to pay dividend to its shareholder from Luxembourg which was a partnership without a legal personhood, including for tax purposes, under Luxembourgian income tax laws. The shareholder holds at least 10% of the shares in the Polish company. While the right to dividend vests in the Luxembourgian company, the dividend is beneficially owned by its shareholders, one of which is a Polish limited liability company liable to tax in Poland on all of its worldwide income (Polish shareholder). Here, too, the Authority did not question the availability of the look-through approach but, as in the first ruling, made it clear that all the dividend tax exemption conditions must be satisfied. This time the Authority held that the case does not meet the condition under Article 22(4)(3) of the CIT Act, i.e. the Polish shareholder will not directly own shares in the Polish company. Consequently, the Authority denied the applicant the right to WHT exemption under Article 22(4) of the CIT Act with respect to the subject dividend.
What is more, a failure to meet the same exemption condition as in the ruling of 25 Aug 2023 was also relied upon by the Authority in its ruling of 30 Mar 2021 (ref. 0114-KDIP2-1.4010.27.2021.2.JC). Importantly, though, in the latter ruling the Authority confirmed that the look-through approach will allow payment to the ultimate beneficial owner (further down the chain from the intermediary) to enjoy the preferential WHT treatment under the applicable double tax treaty.
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