Withholding tax – what is it and which services are subject to it?

This applies, for example, to payments such as dividends, interest, royalties and fees for intangible services (consultancy, advertising, legal and accounting services). The standard WHT rate is 20%, but it may be lower or the payer may not collect the tax at all, depending on the specific provisions of double taxation agreements that Poland has concluded with other countries, or exemptions provided for in Polish tax law.

Withholding tax by the payer – what does this mean?

Withholding tax by the payer means that when paying remuneration to a non-resident, the payer deducts and accounts for the relevant amount of tax, and the recipient receives the amount reduced by this tax.

However, where it follows from the contract or the terms and conditions of the service that the entity making the payment assumes the obligation to pay withholding tax, the so-called grossing-up method must be applied. This means that the beneficiary receives the full agreed amount, whilst the withholding tax is paid by the payer from their own funds. In practice, grossing-up involves calculating the gross value by dividing the net amount by a factor equal to the difference between 1 and the tax rate.

Withholding tax must be paid into the payer’s tax micro-account within the statutory time limit.

Which services are subject to withholding tax?

The scope of income subject to withholding tax is set out in Articles 29 and 30a of the Personal Income Tax Act and Articles 21 and 22 of the Corporation Tax Act. The following focuses on typical examples from taxpayers’ business activities.

1. Advertising services from Google, Facebook

If a Polish entity purchases advertising (e.g. Google Ads, Facebook Ads) from a foreign supplier, the payment is formally subject to withholding tax. However, the payer will not be obliged to withhold this tax if they hold a certificate of the service provider’s tax residence valid at the time of payment.

2. Software licences
3. End-user licence – the right to use software (e.g. access to an application, without the possibility of commercial use). The authorities consider this not subject to withholding tax, as it involves only use, not the transfer of copyright.
4. SaaS or cloud access – the user utilises the application in the cloud, without the transfer of a copy of the software. Such services are often classified as services (rather than licensing), so no withholding tax is levied.
5. Consultancy, legal and accounting services, data processing

These services provided by non-residents are subject to WHT at a rate of 20%. An exception is the application of preferences under a double taxation agreement – in such cases, the payer may not withhold tax at source provided they obtain a certificate of tax residence for the service provider that is valid at the time of payment.

Withholding tax – what must the payer do in practice?

1. Firstly, the payer must verify the nature of the payments being made, in particular whether they are payments listed in the provisions of the Personal Income Tax Act or the Corporate Income Tax Act mentioned above (depending on the status of the payment beneficiary).
2. If the payment is subject to withholding tax in Poland, the payer should verify whether Poland has concluded a double taxation agreement with the country of residence or domicile of the actual beneficiary of the payment (note: this applies to tax-transparent entities).
3. If Poland has concluded a double taxation agreement with the country in question, the payer should verify the possibility and conditions for applying a reduced tax rate or for not withholding tax. The payer should obtain a certificate of residence. In some cases, they should also document that they have verified the status of the beneficial owner (regarding interest and licences), although the tax authorities extend this obligation to other receivables subject to withholding tax – namely, intangible services listed in the relevant legislation.
4. If the payer is not entitled to withhold tax, or if the withholding tax exemption does not apply, the payer must account for withholding tax in Poland (either by deducting it from the contractor’s receivables or by grossing up the receivable – depending on the agreement with the contractor). The payer is also required to submit the IFT-1R/IFT-2R, PIT-8AR/CIT-10Z returns within the statutory deadline (depending on the non-resident status of the natural or legal person).

Summary

Withholding tax is a risky area of international taxation. A Polish payer is responsible for collecting WHT on certain income paid to non-residents, unless a preference provided for in Polish legislation or in double taxation agreements concluded by Poland applies. However, in the case of large entities, one should also bear in mind the ‘pay and refund’ mechanism, in the context of payments exceeding the threshold of PLN 2,000,000 set by the legislator (in which case, as a rule, the payer collects tax on this excess in accordance with domestic regulations, without applying the preferences arising from treaties. The legislator has, however, provided for certain solutions in this regard).

A thorough analysis of the agreement, certificate and specific service allows for the mitigation of tax risk and the utilisation of available exemptions or preferential rates.

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