Withholding tax and the certificate of tax residence - good to know!

Service-Tax

Transactions with foreign entities may result in the obligation to pay withholding tax. What is withholding tax and who should pay it? Do I need a tax residence certificate and what does it protect against? You will find answers to these and other questions in the article!

Withholding tax on transactions with foreign entities

The obligation to pay withholding tax may occur when the entrepreneur purchases services from foreign contractors. This type of tax liability occurs only in relation to certain activities, including:

  • from copyrights or related rights, from rights to inventive designs, trademarks and decorative designs (tax in the form of a lump sum in the amount of 20% of income),
  • for information related to experience gained in the industrial, commercial or scientific field (lump sum tax of 20% of income),
  • obtained on the territory of the Republic of Poland by foreign air navigation companies, excluding revenues from scheduled air passenger transport, the use of which requires the passenger to have an air ticket (tax in the form of a lump sum of 10% of revenues),
  • for advisory and accounting services, market research, legal services, advertising services, management and control, data processing, employee recruitment and recruitment services, guarantees and sureties (tax in the form of a lump sum of 20% of income).

A detailed catalog of activities subject to withholding tax is included in Art. 29 of the Personal Income Tax Act.

Withholding tax and tax payment deadline

An entrepreneur who pays remuneration for purchased services to a foreign entity is required to withhold tax at source, which means that the amount of tax should be deducted from the remuneration. Thereafter, the trader should pay the withholding tax by the 20th day of the month following that in which it was collected.

Certificate of tax residence and withholding tax

According to Art. 5a point 21 of the Personal Income Tax Act, a certificate of residence is a certificate of the taxpayer's place of residence for tax purposes, issued by the competent tax administration authority of the country of the taxpayer's place of residence.

Pursuant to Art. 29 sec. 2 of the Personal Income Tax Act, the application of the tax rate resulting from the relevant agreement on the avoidance of double taxation or failure to collect (not pay) the tax in accordance with such an agreement is possible provided that the taxpayer's place of residence is documented for tax purposes with a certificate of residence obtained from him.

Having a current tax residence certificate may protect us from paying the tax or paying this tax in a lower amount, thanks to which the payer has the right to apply a more favorable taxation method.

The certificate of tax residence confirms that the company's seat is located in a given country and taxes are paid there. Another way of documenting the place where tax liabilities are settled does not constitute grounds for exemption from the obligation to pay withholding tax.

Certificate of tax residence - necessary elements

The regulations do not define a specific template of a residence certificate. However, it should contain the following data:

  • date of issue, optional validity period (otherwise the certificate of residence is valid for a period of 12 months),
  • the name of the authority that issued the certificate,
  • confirmation of the place of residence or registered office of the taxpayer in a given country and subject to unlimited tax liability there.

How long is the tax residence certificate valid?

Pursuant to Art. 41 sec. 9a of the Personal Income Tax Act, if the taxpayer's place of residence for tax purposes has been documented with a certificate of residence that does not contain its validity period, the payer may take into account this certificate when collecting the tax for the next twelve months from the date of its issue. This means that if the validity period is not specified on the certificate of residence obtained from the counterparty, such a document will constitute the basis for the application of the provisions of the agreement on avoidance of double taxation only for a period of 12 consecutive months from the date of issue of the certificate.

However, it should be borne in mind that a certificate without a validity period will not be able to be used for billing purposes if the place of residence or registered office of the taxpayer changes before 12 months. Therefore, if we have the knowledge and documents confirming such a change, we do not have the right to apply the provisions of the agreement on the avoidance of double taxation.

Withholding tax and the e-certificate of residence - is it a basis for tax exemption?

According to the individual tax ruling of November 13, 2017, no. 0111-KDIB1-3.4010.371.2017.l.JKT, issued by the Director of the National Tax Information, the certificate of tax residence sent in electronic form is the basis for the application of the provisions of the double taxation treaty:

"Pursuant to Art. 194 § 1 of the Tax Ordinance, official documents drawn up in the form prescribed by law by public authorities appointed for this purpose constitute evidence of what was officially stated in them. Therefore, an official document will be such a certificate of residence, which was drawn up in the form prescribed by the law of a given country by a body appointed for that purpose. Therefore, if, under the law of a given country, it is possible to obtain a certificate of the place of residence for tax purposes both in paper and in electronic form, both forms are issued by the competent tax authority of a given country and have an equivalent status under the law of that country, the payer will be authorized to recognize such certificate of residence in any of these forms. Such a certificate of residence in an electronic form will therefore be the basis for the payer to apply the provisions of the treaty on avoidance of double taxation ”.

How to obtain a certificate of residence in Poland?

In order to obtain a certificate of tax residence in the territory of the Republic of Poland, you must submit an application to the tax office for a certificate of residence or seat for tax purposes. The waiting period for the certificate is 7 days, and its issuance requires the payment of stamp duty.