Jakub Spławski, Paweł Kempa
Rzeczepospolita
The beneficial owner definition was changed with effect from 1 January 2022. Whether or not it is satisfied is in many cases crucial for withholding tax exemptions or preferences to apply. Comparing to the prior definition, the new one no longer refers to specific business substance test requirements and instead requires an assessment of the “nature and scale” of the business conducted by the recipient within the scope of the payment.
The new definition has no accompanying tax guidance to help taxpayers in its practical application. But there has been some turnaround here in recent months when the Provincial Administrative Court in Lublin tested substantive business activity (which in Poland is called “genuine business activity”) in specific cases.
You may remember that, in order to avoid the pay and refund mechanism (where tax is obligatorily withheld at source in the case of payments in excess of PLN 2 million), taxpayers or withholding agents may apply for what is called a preference opinion. This opinion may be refused and one of the reasons is if there is a reasonable suspicion that the foreign taxpayer does not carry on a genuine (substantive) business activity in its home country.
The Lublin court, hearing petitions for the judicial review of such refusals by a Lublin-based tax office, set out to present its own approach to the substantive business activity test.
In each of the cases the court engaged in a detailed examination of the business concerned, and in particular analysed the taxpayer’s financial statements in terms of assets held and costs incurred.
The court’s approach indicates that, in order to satisfy the requirements of due diligence in verifying withholding tax exemption conditions, you need to hold a scrutiny of the recipient’s circumstances, including an analysis of its assets and how its regular business is operated and managed. Such an approach may sometimes omit to grasp the realities of multinational enterprises where human resources or tangible assets can be shared among many member entities to achieve cost optimisation and functional specialisation, with the costs of such resources or assets recharged on those who use them.