What exactly is withholding tax?
Withholding tax is a flat-rate form of income tax levied by payers who have a residence, registered office or foreign permanent establishment in the country where the income arises. So if we want to describe how withholding tax works on Polish soil, we will say that it is collected by payers who reside, have their headquarters or operate a foreign establishment in Poland.
Normally, withholding tax is imposed on entities that earn income in Poland and are not residents, although there are also circumstances in which residents are required to pay withholding tax.
Who is affected by the withholding tax obligation?
Withholding tax can apply to both legal entities and individuals. In this arrangement, the taxpayer is a company that records cross-border payments (receives transfers from abroad). The withholding tax payer is the entity that makes the transfer (payment) to the taxpayer.
In practice, withholding tax must be done by domestic companies (residents) in the context of payments made to foreign companies with which they do business, which (usually) are not residents.
What are the withholding tax rates?
Currently, two main withholding tax rates apply – 19% and 20%, as well as an additional rate of 10%.
- The 19 percent tax rate applies in the context of dividends,
- A 20% tax rate applies on interest, royalties, etc,
- an additional rate of 10% applies if revenue is earned from the provision of air or sea transportation services.
In what situations does withholding tax apply?
It is worth noting at this point that we are talking about withholding tax obligation only during payments made in foreign transactions – so if you do not conduct such business with foreign entities, the topic will most likely not apply to your company.
Let’s find out in which situations withholding tax is required!
20% of WHT relates to revenue generated from fees for services provided in the field:
- entertainment activities,
- sports activities,
- performance activities.
In a situation where the activity is carried out by foreign legal entities, and organized through legal or natural persons operating in Poland, we will also apply the 20% rate.
This applies to service fees:
- Advisory,
- accounting,
- legal,
- advertising,
- administrative,
- recruitment, etc.
It is also used in the context of intangible assets:
- interest,
- Copyright and related rights,
- royalties,
- Rights to designs, trademarks and patterns,
- use or sale of the right to use industrial equipment, including means of transportation,
- sharing of knowledge (know-how).
The possibility of applying the 10% WHT tax rate applies to revenues:
- obtained from export fees for cargo and passengers accepted for carriage in Polish ports by foreign commercial shipping companies,
- obtained by foreign air navigation companies.
In the case of individuals, withholding tax (PIT) must be paid if the non-resident entity records income from:
- shipping and inland waterways,
- Air scheduled passenger transportation and air transport,
- payment of dividends and shares in the profits of legal entities,
- interest,
- royalties,
- exercise of free professions,
- conducted artistic or sports activities,
- pension or annuity.
Is it possible to avoid withholding tax? Not exactly, but many countries have signed double taxation treaties, and Poland is on the list of signatories. When we refer to the avoidance of double taxation, we are referring to a situation in which a taxpayer would have to pay income tax both in the country where he or she is registered and in the country where he or she earned income. Thanks to the aforementioned international agreements, in such a situation the taxpayer can apply a lower tax rate or even not collect any tax at all – but this requires a tax residency certificate and due diligence.
What are the current withholding tax regulations?
Income tax withholding regulations have undergone a number of changes in recent years – the latest tax changes were introduced with the beginning of this year. Here are some of the most important provisions that have received new wording:
- If the total amount of passive receivables (which include, among other things, interest, royalties, dividends, etc.) paid to a related party in a given tax year exceeds PLN 2,000,000, the tax payer is obliged to collect a lump-sum income tax charged at the standard rate on the amount exceeding PLN 2,000,000 (cf. Article 26, item 2e of the CIT Law).
- If the payer or taxpayer collects the tax, it can request a refund.
- Non-resident taxpayers may be exempt from paying withholding tax for income earned on Treasury bonds and bills.
- The WH-OSC and WH-OSP statements are valid for longer, specifically, until the end of the tax year in which they were filed. Prior to the changes, the validity period was two months.
All details regarding the scope of the withholding tax are set forth in the Personal Income Tax Law and the Corporate Income Tax Law.
