Tax authorities are increasing the frequency of withholding tax (WHT) audits. Data from the Finance Ministry clearly shows that these audits have become more effective. This tax can generate high financial risks so appropriate steps should be taken to ensure WHT compliance and safety.
Increasing number of WHT audits
In 2023 alone, tax authorities held 202 withholding tax audits, generating assessments for a total sum of more than PLN 650 million. Statistically, then, an audit brought on average PLN 3.2 million in delinquent tax. Compare that to data from two years back, when the same authorities completed 86 audits, generating assessments for a total of nearly PLN 59 million, with an average tax delinquency of PLN 684K. As can be seen, not only did the tax authorities increase the number of their WHT audits by more than twice, but the audits have become more effective as well. This trend continues on an upward slope and even more audits should be expected. The impact can be illustrated by the fate of a real estate company which has recently been required to pay PLN 20 million in overdue withholding tax. The company as a withholding agent unlawfully applied the WHT exemption and did not withhold and remit corporate income tax on its loan interest payments. As a consequence, the company had to pay nearly PLN 14 million in delinquent withholding tax plus PLN 6 million in default interest.
How to stave off unwanted consequences in the case of infringement?
When applying exemptions from or reduced rates of withholding tax, Polish payers should act as withholding agents and always exercise what is called due diligence. The hardest part of this process is to verify if the foreign recipient is the beneficial owner of the payment and conducts genuine business activities (has business substance).
The law offers two ways to safely use preferential WHT treatments:
- Assurance opinion
- WH-OSC declaration
Assurance opinion
This is an official confirmation of your right to apply a specific preferential withholding tax treatment to a specific type of payments made to a specific recipient. Applying for this opinion requires businesses to make certain verification and documentation efforts. Before the application is filed, an assessment should be made whether all the requirements for a given preferential treatment are satisfied, which is something that must subsequently be proved in the application itself. Also, the application will have to be accompanied by a great number of source documents required by the authorities to make the applicant’s case. One of the more difficult tasks is to prove that the foreign part is the beneficial owner of the payments. The opinion gives the withholding agent an assurance that it may safely apply its preferential WHT treatment to the relevant payments for a period of 36 months.
WH-OSC declaration
This is a declaration that you have the required documents entitling you to apply a preferential tax treatment. Before filing the declaration, you will want to verify if, given the source documents, the recipient of the payment is its beneficial owner and all the conditions have been satisfied for the particular treatment to apply. These declarations (whether filed first time or renewed) cover one tax year only. The due date is important as late filing will be legally ineffective.
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To be compliant, any use of those measures should be based on knowledge of the law, experience with similar cases, and an in-depth analysis of applicable case law (including tax rulings). Sendero Tax & Legal experts will be happy to support you in any WHT matters. It’s worth ensuring withholding tax compliance, especially in view of tax authorities’ focus on this area and the related increase in tax audits.