7 January 2020

Due diligence in withholding tax

Income Tax Act which came into force in October 2018, informs about the necessity to exercise due diligence in transactions subject to withholding tax. The Ministry has issued an advisory statement regarding due diligence, addressed to WHT payers.

Withholding tax (WHT) is a tax deducted at source, especially one levied by some countries on interest or dividends paid to a person resident outside that country – in Poland concerning amounts exceeding PLN 2 million per annum. Under current regulations, entities could apply for an exemption or preferential WHT tax rate at the time of payment. The most controversial, however, is the obligation to exercise due diligence while verifying the contractor.

Due diligence, according to legislators, means several actions undertaken by the WHT payer, aimed at minimizing the risk of tax irregularities. Unfortunately, the definition and expected scope of these activities are still unclear. To address these problems, the Ministry has published a collection of advice called Rules for collection at source.

Due diligence – withholding tax

The statement does not provide a coherent and unambiguous definition of due diligence in WHT. Instead, it proposes several helpful practices that should be followed to properly exercise due diligence when checking foreign entities. When checking for the possibility of a preferential rate or exemption, payers of the withholding tax should:

• Confirm the credibility of the contractor’s tax residence (preferably by collecting documentation confirming this).
• Verify the identity of beneficial owners and company owners.
• Collect the documents such as transfer prices, financial flow documentation and audit reports proving the entity’s business activity.

Support questions

Legislators propose a set of questions that must be answered each time to verify the contractor effectively.

• What staff, equipment, and premises does the company have?
• Do company directors and board members perform their functions in a service-oriented manner?
• Are the documents regarding company management signed within the country of its registration?
• Does the company have the possibility of organizing board meetings (at which key decisions are made) in the country of its registration? Do such meetings take place at the entity’s headquarters?
• Is the company’s registered office address used simultaneously by many entities? If so, how many entities?
• Do the company’s decision-makers have local email addresses/local phone numbers?

Remember that the set of questions proposed by the Ministry is not a complete guide for due diligence procedures, but only suggestions that can be used voluntarily.

Due diligence – further amendments coming soon

The Ministry is expected to broaden the scope of regulations by introducing clear definitions and practices. The options currently being considered by legislators include the requirement of the residence certificate and the introduction of the white list of countries to which preferential provisions will apply.