The Polish withholding tax (WHT) system operates under a pay-and-refund model, requiring tax to be withheld at the source and later refunded if the relevant conditions are met. However, navigating the refund process can be challenging due to evolving interpretations by tax authorities, as demonstrated by a recent case handled by the Penteris tax team.
The Dispute: Legal Standing and the Gross-Up Clause
Our client sought a refund of WHT based on a gross-up clause, which stipulated that the payer would bear the economic burden of the tax. The Head of the Tax Office conducted an extensive two-year review, including a detailed verification of the beneficial owner's status, an analysis of business substance, and multiple inquiries with foreign tax authorities. Despite this exhaustive process, the tax authority ultimately dismissed the claim—not based on substantive tax law, but on procedural grounds.
The reasoning? The tax authority argued that our client lacked legal standing to apply for the refund. It contended that, in the absence of clear contractual documentation explicitly assigning the economic burden of the tax, the refund claim was invalid. This stance effectively broadened the statutory conditions for WHT refund eligibility, introducing a formal requirement not explicitly set out in the law.
The Loophole: A Matter of Interpretation
The case exposed a significant legislative gap. While Polish tax law provides that a WHT refund may be granted to the taxpayer or the entity that bore the economic burden of the tax, it does not specify how this burden must be documented. This ambiguity allows tax authorities to deny refunds based on formalistic requirements, even when the economic reality supports the claim.
The position taken by the first-instance authority placed an excessive evidentiary burden on the taxpayer, effectively making WHT refund eligibility contingent on contractual provisions that may not always be explicitly documented. This approach undermines the certainty of the refund process and increases the compliance risks for businesses operating under gross-up arrangements.
Reversing the Decision
On appeal, the director of the regional revenue administration office accepted the arguments presented on behalf of our client and overturned the initial ruling. This decision reaffirms that the WHT refund mechanism should focus on economic substance rather than rigid formal requirements.
Looking Ahead: Ensuring Legal Certainty
This case highlights a persistent issue in Poland's WHT framework: the discretionary interpretation of refund eligibility criteria by tax authorities. To mitigate risks, taxpayers should ensure that gross-up clauses are explicitly documented in agreements and supported by clear evidence of the tax burden. Legislative clarification would also be welcome to prevent similar disputes in the future.
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