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Multinationals using dividend payments to repatriate cash from Poland are advised to double-check their tax structures following a finance ministry warning against treaty shopping, local tax practitioners said.
The warning highlights the scenario of a multinational from outside the European Economic Area (EEA) using an intermediary company from within the EEA to avoid paying a withholding tax on dividends both in Poland, where the rate is up to 19 percent, and the country of the intermediary.
This is technically possible because dividend distributions from Poland to entities from other EEA countries are exempted from withholding tax under European Union parent-subsidiary rules and because countries like the Netherlands or Luxembourg have double-tax treaties that impose no withholding tax on dividend payments to entities from the United States and other places outside the EEA.
But it amounts to aggressive tax planning if such structures are found to have been created “without sound economic reasons,” such as when the intermediary company is a mere letterbox company, the finance ministry said in the Nov. 3 warning.
In addition to the 28 EU member countries, the EEA includes Norway, Iceland and Liechtenstein.
“If you have a structure using” the withholding tax “exemption, please sit down and verify that you fulfill all the conditions,” Slawomir Krempa, a tax partner, mergers and acquisitions, PwC Poland, told Bloomberg Tax Nov. 16. “The structures have been set up, in most cases, five, 10, 20 years ago. The law around the exemption has been changing, and so has the practice and understanding of the tax authorities.”
According to Krempa, qualifying conditions for the withholding tax exemption in Poland include a minimum 10 percent holding for at least two years; tax residency of the receiving entity being within the EEA and; as of 2016, also the requirement for the receiving entity to have an economic substance and business purpose.
“This is not something which is easy to check by an in-house lawyer,” Krempa said. “It’s not a simple check-the-box verification. It needs to be a kind of substantial, based-on merits verification by the operational management, not the back-office staff.”
Piotr Liss, a tax partner at RSM Poland in Poznan, agreed that companies need to double-check their tax structures in light of the warning.
“I would advise companies to check on their structures to determine if they fall under the warning or not,” he told Bloomberg Tax Nov. 13. “If they do, they need to either make a letterbox company a real beneficial owner or change the structure.”
According to Liss, the warning is of particular importance to United States companies as they “most commonly” invest in Poland via European intermediaries.
“We have a lot of investment from Japan or from China, but they invest directly,” he said. “There is no such approach as with the United States where they generally invest in Europe through Dutch and Luxembourg entities.” The warning is part of “strengthening our anti-abuse policy,”
Filip Switala, director of the tax system department at the Polish Ministry of Finance, told Bloomberg Tax Nov. 15. “Basically, what we are saying in this warning is that if you have a company, which is empty, has no function, and you use it as a letterbox just in order to get a treaty or directive benefit, this will not do.”
To be sure, “everybody who is dealing with taxes is aware that treaty shopping is something which is prohibited,” Marcin Matyka, a co-chair of the Tax & Financial Services Committee of the American Chamber of Commerce in Poland and a partner, tax litigation and international tax, at Andersen Tax in Poland, told Bloomberg Tax Nov. 14. “From this perspective, this issue presented in the warning is nothing new.”
Switala admitted that “the warning may come across as redundant to many major multinationals operating in Poland and their tax advisers.”
“But reputable tax advisers are not within the reach of everybody,” he went on to say. There are taxpayers who “do not really care about the reputable tax advisers’ point of view in this respect, and they don’t ask questions whether a company really has sufficient substance or whether it’s just an empty box.”
As of 2016, any Polish company applying the withholding tax exemption to dividend distributions must possess a written statement from the receiving entity that the entity is a beneficial owner, according to Liss.
This, in and of itself, should be protection enough against a structure being questioned by the tax authorities, he said.
“The approach should be that Polish companies should not be liable for the tax if holding such a statement from the parent company,” he said. “It may happen though that there will be an audit, and the authorities will try to impose the tax unless the Polish company can prove that the company in somewhere in the middle is not a letterbox company. This would not be in line with regulations which clearly state that the Polish entity should not be challenged, but of course it’s possible.”
According to Matyka, possession of the statement is unlikely to be enough, however.
“I am not sure whether this statement fully protects the structure because the statement is one thing and what our politicians think about a structure is another thing,” he said. “The key is whether you are able to protect the assumption that the Dutch company or the Luxembourg company in the middle is an active, real company, that it was put in the middle for business purposes, not only for tax purposes.”
“It’s not enough to have a statement because it might be completely far away from the reality,” he added.
Switala agreed with Matyka.
A beneficial owner statement is a required document for claiming a tax exemption for dividend distributions, but “it’s not 100 percent proof” of the recipient being a beneficial owner, according to Switala.
“It’s one of the proofs that should be taken into account, generally,” he said. “Within the European Union, we have an exchange of information, and we may ask the local tax authorities about companies.”
Nowadays, it is also easy enough to peruse public registries of companies, he added. “I have done it even in Hong Kong,” he said. “You can really see in the documents what is in the companies. In the Czech Republic’s companies’ register, they even have available the balance sheet of a company. So you may see what assets it has, and it’s only four or five clicks on a computer.”
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The finance ministry warning is available, in Polish, at http://www.mf.gov.pl/ministerstwo-finansow/wiadomosci/ostrzezenia-i-wyjasnienia-podatkowe/-/asset_publisher/M1vU/content/ostrzezenie-przed-optymalizacja-podatkowa-zwiazana-z-naduzyciem-zwolnienia-podatkowego-dla-dywidend?redirect=http%3A%2F%2Fwww.mf.gov.pl%2Fministerstwo-finansow%2Fwiadomosci%2Fostrzezenia-i-wyjasnienia-podatkowe%3Fp_p_id%3D101_INSTANCE_M1vU%26p_p_lifecycle%3D0%26p_p_state%3Dnormal%26p_p_mode%3Dview%26p_p_col_id%3Dcolumn-2%26p_p_col_count%3D1#p_p_id_101_INSTANCE_M1vU_.
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