Finance Ministry publishes official guidance on withholding tax!

Adam Wnuk

Six years after the major change in law and having produced on two occasions what proved to be unsuccessful guidance proposals, the Finance Ministry have at last issued the final version of its guidance document concerning the use of beneficial owner test for withholding tax purposes.

Business has for a long time urged the Ministry to issue such guidance. So, in this sense, that the document has at last come into being is a positive development that should reduce overall WHT compliance uncertainty.

The guidance offers some business-friendly points:

• For payments to unrelated parties, the right to preferential WHT treatment will be sufficiently proved on the basis of certificate of residence and declaration of the foreign payee (taxpayer).
• No need for beneficial owner test in the case of payments that are not passive income (e.g. payments for intangible services, such as advertising or advisory).
• Business substance test (a.k.a genuine business test) may take into account shared resources if the sharing it limited to EU.
• Look‑through approach (LTA) is acceptable.

However, there are also quite a lot of grains of salt in the guidance. The Finance Ministry has taken a definitely strict approach to passive income payments (dividends, interest, royalties) made to related parties. For example:

• “all circumstances of the case must be examined to check if the given entity is beneficial owner. Thus, with respect to related parties, it is not sufficient to rely merely on the certificate of tax residence and payee’s declaration. Other available documents must be verified, too”
• “the payer must always check if the given entity is indeed one [beneficial owner] (…). What is therefore needed here is an investigation of sorts to not only establish and assess the facts but also evaluate them in legal terms”
• “the payer’s liability cannot be excluded or limited on the basis of taxpayer’s fault, if they are related parties”
• “in any passive income payment between related parties, regardless of the amount paid (and regardless of the declaration, if any), the outcome of the due diligence examination of whether or not requirements have been met for the application of reduced rate, exemption or non-withholding must be that there is “no knowledge justifying a conclusion that there are circumstances precluding” their application”

As it is, then, despite the guidance, withholding tax is likely to remain one of the most problematic areas of taxation.