We would like to draw your attention to a new and controversial line of interpretation regarding the conditions for applying the withholding tax exemption on dividends paid to parent companies, which can be observed in a series of recent rulings of the Provincial Administrative Court in Lublin (an example of this is the judgment of May 19, 2023, ref. no. I SA/Lu 87/23).
In the simplest terms, this court questions the possibility of applying the dividend withholding tax exemption under Article 22(4) of the Corporate Income Tax Act. This provision requires, among other things,
that a company receiving dividends does not benefit from the exemption from income tax on its entire income, regardless of the source of its income. This is questioned when such dividends are not effectively taxed in the country of the company’s registered office, especially due to the fact that the parent company benefits from the tax exemption in that country.
It is worth noting that a similar position was recently expressed by the tax authority conducting a customs and tax audit of one of our clients with regard to compliance with the provisions of the tax law in the lump-sum corporate income tax.
In our opinion, the above view is not correct. It illegitimately goes beyond the formulation of the condition for the tax exemption contained in Article 22(4)(4) of the Corporate Income Tax Act. Additionally, it is based on generalized conclusions from rulings of the Court of Justice of the European Union (for example, the judgment of March 8, 2017, in case C-448/15 – Belgische Staat v Wereldhave Belgium Comm. VA, Wereldhave International NV, Wereldhave NV), issued in specific factual situations, the implications of which, in our opinion, cannot be automatically applied to the situation of all dividend recipients who benefit from the dividend exemption in their country of residence. Furthermore, in our opinion, the Provincial Administrative Court in Lublin makes an incorrect interpretation of the purpose of Council Directive 2011/96/EU of November 30, 2011, on the purpose of the common system of taxation applicable to parent companies and subsidiaries of different Member States. The introduction of the provisions of this directive was to ensure a situation in which, the income corresponding to the profit earned by the subsidiary is taxed only once —at the level of the subsidiary (as was previously the case in domestic relations). The Provincial Administrative Court in Lublin, however, relies on the unjustified assumption that the purpose of this directive is not the complete exemption of dividends from taxation but only their single taxation.
Regardless of our negative assessment of the views expressed by the Provincial Administrative Court in Lublin, it should be noted that there is a risk that tax authorities will adopt this argumentation, in an attempt to deny Polish payers, the right to withhold tax on dividends paid to affiliated companies. We therefore expect many disputes to be brought before administrative courts in such cases. The end of uncertainty in this respect will probably come only with the case law of the Supreme Administrative Court.
In conclusion, although, in our opinion, there is no basis for changing the existing practice of dividend payments, we would like to ask you to take into account the risk of possible disputes with tax authorities in this regard.
Source: The article was created in collaboration with our cooperation partner – SMW Tax Advisory
If you have any questions regarding this topic or if you are in need for any additional information – please do not hesitate to contact us:
CUSTOMER RELATIONSHIPS DEPARTMENT
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