In the course of a customs and tax inspection conducted against C. sp. z o.o., it was established that, despite its obligation, it had failed to calculate, collect and pay withholding tax on the interest paid on loans granted in 2017 – 2018 to C. B.V. in the Netherlands. Due to the Company’s failure to submit a correction to the tax return, the completed customs and tax audit was transformed into tax proceedings.
The tax authorities determined the amount due for uncollected withholding tax on interest paid to the Dutch Company for the individual months from January to December 2017 and from February to August and for October 2018. (a total of PLN 3,787,862.00) as well as ruled on the tax liability of the Company, as payer of the withholding tax, for the aforementioned amount of uncollected tax. In the decision in question, it was acknowledged that the funds which were the subject of the loan granted to the Company and allocated by it for the purchase of the real estate, originated from entities related to it from the B. Group with registered offices in the USA and Canada, then through a number of entities registered in France and Luxembourg were transferred in the form of subsequent loans to F. S.a.r.l., then to C. S.a.r.l., and finally to the Dutch Company which finally concluded the loan agreement with C. sp. z o.o.. In view of this, it was assumed that the aforementioned companies only acted as intermediaries in the transfer of funds for the purchase of real estate in Poland by the Company and, consequently, it was concluded that the Dutch Company was not the actual owner of the interest paid and capitalised by the Complainant in 2017 – 2018 on the loan granted and, therefore, the income received by the Dutch Company on this account was not subject to exemption from taxation, pursuant to Art. 21(3) of the Corporate Income Tax Act of 15 February 1992 (Journal of Laws 2016, item 1888, as amended, in the wording relevant to the case, hereinafter as: ‘u.p.d.o.p.”).
“C. sp. z o.o.” disagreed and appealed to the Administrative Court, where the court overturned the decision.
An appeal was then filed with the Supreme Administrative Court.
Judgment
The Supreme Administrative Court overturned the decision of the Administrative Court and remanded the case for reconsideration.
Excerpts
“In the absence of a definition of the term ‘beneficial owner’ in the regulations of the Polish-Dutch Convention, it is reasonable to refer to the interpretative guidance contained in the Organisation for Economic Co-operation and Development Model Convention (hereinafter: the ‘OECD MTC’) and its official commentary approved by the OECD Council. Although the MTC does not constitute a source of law, the views expressed therein are generally accepted in case law, as the OECD MTC constitutes a model for the construction of double taxation treaties, and at the same time, the use of the commentary to it ensures a situation in which the entities which are the addressees of the norms contained in these treaties will interpret them in a similar manner. According to the wording of the above commentary, the term ‘beneficial owner’ is not used in a narrow, technical sense, but should be understood in its context, in light of the object and purposes of the convention, including tax avoidance and tax evasion (circumvention). In 2003, it was supplemented by comments on ‘intermediary companies’, i.e. companies which, although formally owners of income, have in practice only very limited powers, making them mere trustees or administrators acting for the benefit of the parties concerned and therefore cannot be considered as owners of that income. Paragraph 8 of the commentary to Article 11, as it resulted from the 2003 revision, provides in particular that: ‘the term ‘owner’ is not used in a narrow and technical sense, but is to be understood in its context and in the light of the object and purpose of the Convention, in particular to avoid double taxation and to prevent tax evasion and tax fraud’. Paragraph 8.1 of the same version of the Commentary indicates that: ‘it would be contrary (…) to the object and purpose of the Convention for the source State to grant a reduction in or exemption from tax to a resident of a Contracting State who acts, other than in an agency or other representative relationship, as a mere intermediary on behalf of another person who actually benefits from the income in question’, and that “an intermediary company cannot in principle be regarded as a beneficial owner if, although it is formally the owner of the income, in practice it has only very limited powers, making it only a mere fiduciary or manager, acting on behalf of the parties concerned”.
Transferring the above considerations to the present case, the allegations of violation of substantive law formulated in point I, sub-points 1, 2 and 3 of the cassation appeal should be considered fully justified. In the opinion of the Supreme Administrative Court, the Court of First Instance, contrary to its claim, did not interpret Article 21(3)(4)(a) of the u.p.d.o.p. taking into account the Directive or the Polish-Dutch Convention, and at the same time erroneously assumed that the decision of the authority was based on the content of the provision in the wording which became effective only as of 1 January 2019, i.e. it applied the Act retrospectively. Meanwhile, the legal basis for the contested decision was the provision of Article 21(3) in conjunction with Article 4a(29) of the u.p.d.o.p., in the wording in force in 2017 and 2018, correctly interpreted taking into account the interpretation of international tax law, including Directive 2003/49/EC, the CJEU judgment of 26 February 2019 ref. C-115/16, C-118/16, C-119/16, C-299/16, as well as the Model Convention of the Organisation for Economic Co-operation and Development and its official commentary. In the opinion of the Supreme Administrative Court, the authority was therefore right to assume that the concept of ‘beneficial owner’ had been operating in various normative systems for many years and had its well-established, uniform meaning regardless of whether it was interpreted at the level of national or international law, and therefore it was right to consider that a company is the ‘beneficial owner’ of the interest paid to it only if it has actually received it for its own benefit and not as an intermediary for the benefit of other entities. Indeed, in the opinion of the Supreme Administrative Court, Article 21(3)(4)(a) in conjunction with Article 4a(29) u.p.d.o.p. made the applicability of the exemption from withholding tax on interest payments dependent, also in 2017 and 2018, on the determination of the ‘beneficial owner’ of such interest. Furthermore, it should be emphasised that for the correct application of the above exemption, the Applicant, as the payer of the withholding corporate income tax, was obliged to determine whether not only the formal prerequisites for its application existed in the case, i.e. to verify whether the Dutch Company had a certificate of residence and a declaration that the conditions referred to in Article 21(3) of the u.p.d.o.p. had been fulfilled in relation to the payments, but was also obliged to examine the actual facts, i.e. to verify that the entity to which it paid the interest would be the beneficial owner and that the interest paid did not constitute income received or earned in connection with an artificial arrangement. These regulations on the recognition of the entity to which interest is paid and the related withholding tax obligations of the payer are in fact intended to prevent interest payments to entities that do not actually carry out an economic activity or whose activity is marginal in relation to their participation in a tax avoidance venture.
Therefore, when re-examining the case, the Court of First Instance, taking into account the above interpretation of the provisions constituting the basis for the contested decision, will examine whether the Appellant complied with its obligations and whether the authority, in the contested decision, presented arguments supporting its position, and will then assess whether the prerequisites for application of the income tax exemption existed in the case in question.“
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