Publication date: January 03, 2025
Binding force of general tax interpretation
A general tax interpretation is an institution regulated in the Polish tax ordinance of 29 August 1997. It is a legal instrument used by the Polish Ministry of Finance to explain tax law provisions to ensure their uniform application, prevent differences in interpretation and reduce the risk of many conflicting interpretations of tax regulations by tax authorities. A general tax interpretation may be issued ex officio or upon application, which, in accordance with paragraph 2 of Article 14 of the tax ordinance, should justify the need to issue an interpretation, i.e. contain a presentation of the issue and an indication of the tax law provisions that require interpretation and an indication that in the same legal situations there has been an inconsistent application of tax law provisions by tax authorities. An essential part of a general interpretation is to describe the issue in connection with which the interpretation is issued and to explain the scope and manner of application of the provisions in the aforementioned issue.
General interpretations are not a source of domestic law, which is why they have no binding force. As mentioned above, it is an instrument intended to resolve interpretational doubts, which is why failure to comply with it does not result in a penalty for the taxpayer. This thesis is supported by Article 217 of the Constitution of the Republic of Poland, which states that “The imposition of taxes, other public levies, the determination of entities, objects of taxation and tax rates, as well as the principles of granting reliefs and remissions and categories of entities exempt from taxes shall be made by means of an act”, which means that a general interpretation cannot be considered a binding act for the taxpayer. Such an interpretation has protective effects for the taxpayer, i.e. in the event of compliance with it, the taxpayer cannot suffer negative consequences of such conduct. Moreover, in accordance with Article 14m of the Tax Ordinance, the protection of the taxpayer continues to apply, even if the interpretation has been changed or expired. This is a manifestation of the principle of acting in trust in the public administration.
General view is also that such individual interpretation is also not binding on administrative bodies. It is not a source of internal law, but the purpose of issuing a general interpretation is to unify the application of legal provisions, so these interpretations may indirectly affect the application of tax law by the authorities, even though they are not de facto binding on them.
In summary, general interpretations are neither sources of law nor acts of internal law. A general interpretation does not have the character of an administrative act, because it does not decide on the rights of the recipient in an authoritative manner. Despite the lack of binding force, this instrument serves an auxiliary function for public administration bodies and taxpayers, because it unifies the interpretation line of tax regulations and eliminates discrepancies in their application. In the event that the taxpayer complies with the guidelines contained in the general interpretation, even if erroneous or repealed, he is protected against a negative sanction.
Withholding tax is a type of tax that is deducted by the payer from the income of a non-resident. This tax is then transferred to the tax authorities in the country where the payer has its registered office. Withholding tax includes: dividends, interest, royalties and remuneration for intangible services, e.g. legal advice. The withholding tax mechanism is regulated in the Act of 15 February 1992 on Corporate Income Tax (CIT). Art. 21 sec. 1 of the aforementioned Act specifies the income of non-residents that is subject to taxation in Poland. This article lists, among others, interest, dividends, royalties, remuneration for intangible services. The above-mentioned income is subject to taxation by the payer in Poland. Another important article of the CIT Act is Art. 22 sec. 1-3, which imposes on the payer the obligation to withhold tax on payments of non-residents, the rate of which is 19%. In the event of meeting certain conditions in Art. 22 sec. 4 the Act provides for an exemption from withholding tax for dividends paid between parent companies and subsidiaries in the European Union or EEA countries. Art. 26 sec. 1-2 specifies the obligations of the payer in the form of withholding tax and transferring it to the tax office and contains provisions on documenting the collection of tax. The Personal Income Tax Act (PIT) also regulates withholding tax issues, namely Art. 29 sec. 1 of the PIT Act specifies the principles for withholding tax collection by payers who pay remuneration or other income to non-residents. Poland has also concluded international agreements on the avoidance of double taxation, which are important in the context of withholding tax, as they specify which withholding tax rates apply to income earned by non-residents.
Withholding tax is collected by the payer, who pays this tax to the Polish tax office. In Poland, the withholding tax rate is 19%, but depending on international agreements, it may be reduced. The payer is obliged to collect the tax when the income is paid to a non-resident, transfer it to the Polish tax office and store documentation confirming the tax residence status of the recipient of the payment. If, in accordance with the provisions of double taxation treaties, the withholding tax is not subject to taxation in Poland, then after the payer obtains a certificate, it will not be collected. However, the exception is a situation when the amount due exceeds PLN 2 million. In such a case, regardless of the provisions exempting from double taxation and national regulations, withholding tax is mandatory.
Dividend exemption
In the case of dividends, the Polish provisions of the CIT Act, specifically Article 22 section 4, provide for an exemption from dividend tax when:
1/ the payer of dividends and other revenues from the share in the profits of legal persons is a company with its registered office or management board in the territory of the Republic of Poland,
2/ the entity obtaining income (revenue) from dividends and other revenues from participation in the profits of legal persons referred to in point 1 is a company subject to income tax on its entire income in the Republic of Poland or in a Member State of the European Union other than the Republic of Poland or in another country belonging to the European Economic Area, regardless of where it is earned,
3/ the company referred to in point 2 directly holds no less than 10% of the shares (stocks) in the capital of the company referred to in point 1,
4/ the company referred to in point 2 does not benefit from exemption from income tax on all of its income, regardless of the source of such income.
General interpretations of the Minister of Finance of 15 and 20 November 2024
The general interpretation of the Minister of Finance of November 15, 2024, relating to Article 22, paragraph 4 of the Corporate Income Tax Act (CIT), clarifies the conditions for applying the exemption from taxation of non-resident income from dividends and other income from a share in the profits of legal persons. The purpose of this interpretation is to ensure uniform application of tax law provisions, particularly in the context of the provisions of European Union Directive 90/435/EEC, implemented by the provisions of the Polish CIT Act, which eliminate double taxation of dividends between companies from different EU and EEA Member States.
The main issues of interpretation concern doubts related to two conditions contained in Article 22 section 4 point 2 and point 4 of the CIT Act, which require that:
1/ The company receiving the dividend was taxed “on all of its income, regardless of where it was earned.”
2/ This company could not benefit from exemption from taxation of all its income.
The Minister of Finance indicates that the condition of “not using the exemption from taxation of all of one’s income” is controversial in the case law of administrative courts. In one case, the courts argued that the exemption does not apply if the company uses tax exemptions at all. In another case, the court indicates that failure to pay tax due to, for example, a tax loss should not exclude the exemption. The Minister of Finance explains that the purpose of the provisions of the Parent-Subsidiary Directive is to avoid double taxation of dividends transferred between companies from different countries, and not to completely eliminate taxation of these profits. Therefore, in the context of art. 22 sec. 4 item 4 of the CIT Act, a company that uses the exemption from taxation of dividends in another EU/EEA country may nevertheless meet the conditions for applying the exemption in Poland, provided that it does not use any tax exemption on its entire income. This interpretation also emphasizes that the exemption from taxation is not dependent on the situation in which the company does not pay income tax due to the settlement of losses or the receipt of only dividends.
The purpose of the above interpretation is to clarify the application of income tax exemption in the case of companies receiving dividends and other income from profit sharing, ensuring compliance with European Union regulations.
The general interpretation of the Minister of Finance of 20 November 2024 concerns the application of the conditions for exemption from taxation specified in Article 21 paragraph 3 of the Corporate Income Tax Act (CIT), which relates to interest and royalties obtained by non-residents in Poland. The purpose of this act is to clarify how the provisions on exemption from income tax should be applied in the context of international transactions between companies from different EU and EEA Member States.
The interpretation refers to Council Directive 2003/49/EC, which aims to eliminate double taxation of interest and royalties in international transactions. This directive indicates that interest and royalties paid between entities from different Member States should be subject to single taxation, eliminating double taxation in two countries. The CIT Act in Article 21, Section 3, sets out conditions, the fulfilment of which leads to exemption from income tax. In the case law of Polish administrative courts, there is a discrepancy as to the position when the condition of “not using the exemption from taxation” is met. In one case, the case law states that the exemption from taxation of all income in the country of residence may affect the lack of entitlement to exemption in Poland, while in another case, the case law recognises that failure to pay tax due to a loss does not disqualify from the right to exemption. In turn, the Court of Justice of the European Union (CJEU) ruled that the condition of “not benefiting from tax exemption” is not met if the entity receiving the interest is exempt from income tax in its country of tax residence. This means that if the company does not pay income tax in its country (e.g. due to tax exemption), it cannot benefit from the Polish exemption.
In the general interpretation of November 20, 2024, the Minister of Finance took the position that, in order to apply the exemption from taxation of income obtained by non-residents from interest and royalties, provided for in Article 21 paragraph 3 of the Corporate Income Tax Act (CIT), certain conditions must be met. The key requirement is that both the company paying these receivables and the company receiving them must be subject to taxation on their entire income in an EU or EEA Member State. Additionally, the Minister indicates that the condition for applying the exemption from taxation under Article 21 paragraph 3c of the CIT Act is that the recipient of the receivables does not benefit from the exemption from taxation of their entire income in their country of tax residence. This means that if the recipient of interest or royalties benefits from a tax exemption in their country of residence, they do not meet the conditions for applying the exemption in Poland. Also, the issue of payment of tax by a taxpayer who does not pay income tax due to the settlement of losses does not exclude meeting the conditions for the exemption, provided that the taxpayer is subject to taxation and does not benefit from the exemption from taxation of their entire income.
To sum up, the Minister of Finance emphasises that the key factor for applying the tax exemption is whether the recipient of the income (interest and royalties) does not benefit from an exemption from taxation of all of its income or from an exemption from income tax on specific categories of income in its country of residence.
List of legal acts