I. sp. z o.o. is a Polish tax resident. Its sole shareholder is an Italian tax resident company. The Company plans to pay a dividend to the shareholder in the future, and therefore asked the following question to the Polish Tax Chamber: in order to exercise the right to exempt a dividend paid to a shareholder from corporate income tax (withholding tax) under Article 22(4) of the Corporate Income Tax Act of 15 February 1992 (Journal of Laws of 2019, item 865, hereinafter the CIT), is the Company required to verify whether the entity to which the dividend is paid is the actual owner of the dividend?
The Tax Chamber answered that verification of the beneficial ownership is part of the due diligence obligation introduced in Article 26(1) of the Corporate Income Tax Act in 2019.
The company challenged this interpretation before the Administrative Court and the Court found the complaint well-founded and overturned the interpretation of the Tax Chamber.
An appeal was then filed by the authorities with the Supreme Administrative Court.
Judgment of the Supreme Administrative Court.
The Court set aside the judgment of the Administrative Court in its entirety and decided in favor of the authorities.
Excerpts
“It should be recalled that the Danish judgments point out that the mechanisms of Directive 90/435 (now 2011/96) were ‘introduced to address situations where, without their application, the exercise by Member States of their taxing authority could lead to profits distributed by a subsidiary to its parent company being taxed twice (judgment of 8 March 2017, Wereldhave Belgium and Others, C-448/15, EU:C:2017:180, paragraph 39). On the other hand, such mechanisms cannot apply if the owner of the dividends is a company established for tax purposes outside the Union, since, in such a case, the exemption from withholding tax on the dividends in question in the Member State from which they were paid could lead to those dividends not being effectively taxed in the Union.” (paragraph 113 of the judgment). In paragraph 5 of the operative part of the judgment, it was held that where the Directive’s “withholding tax exemption regime for dividends paid by a company resident in a Member State to a company resident in another Member State is inapplicable because of a finding of fraud or abuse within the meaning of Article 1(2) of that Directive, the application of the freedoms guaranteed by the EU Treaty cannot be relied upon to challenge the first Member State’s regulation of the taxation of those dividends.”
The CJEU noted that “a Member State must refuse to avail itself of provisions of Union law if those provisions are relied upon not to pursue their objectives but to obtain an advantage under Union law, when the conditions for obtaining that advantage are only formally fulfilled.” (paragraph 72 of the judgment).
In the context of the theses Danish judgments, the reasoning in the CJEU judgment of 7 September 2017, which was extensively cited by the Applicant and the Court of First Instance, must be considered outdated. C-6/16 in the EQIOM case (publ. ZOTSiS.2017/9/I-641). For this reason, the Supreme Administrative Court considered it pointless to refer to it when assessing the correctness of the judgment under appeal.
It is clear from the Danish judgments that the mechanisms created by the Directive cannot be applied contrary to its purpose. They certainly cannot be applied in a situation where the recipient of the dividend will not be its actual beneficiary. National legislation which, when levying withholding tax, makes the application of the tax preference conditional on the exercise of due diligence by the payer by carrying out verification that the recipient of the dividend is its actual beneficiary must therefore be regarded as compatible with the provisions of the Directive. At the same time, in the opinion of the Supreme Administrative Court in the panel hearing the case, even the absence of an express regulation on the verification of the entity that is the recipient of the dividend would not exempt the payer from verifying that the taxpayer is the actual beneficiary of the dividend. It would be unacceptable to argue that, prior to the introduction of the regulation of Article 26(1) of the A.P.C. in the version in force in 2019, the payer could act without due diligence when applying the withholding tax exemption. It is irrelevant for this assessment that neither Article 22(4) of the A.P.D.O.P. nor the Directive contains this requirement expressis verbis, as the payment of dividends without withholding tax would be treated as an abuse of the right. Contrasting this regulation with the provisions relating to the exemption from withholding tax under Article 21(3) of the A.P.C. and Directive No 2011/96, i.e. the provisions governing the exemption from withholding tax of, inter alia, interest on loans and royalties, does not prejudge the fact that there is no obligation to verify the status of the taxpayer when paying dividends.
At this point, it is necessary to stipulate that the tax preference will be admissible in a situation where, although the dividend payment is not made to its actual beneficiary, the look-through approach is applied. This concept allows the application of preferential taxation, or tax exemption, in a situation where, although the payment is made through an intermediary – an entity that is not the actual beneficiary, this actual beneficiary is established in the EU (EEA) and is known. It should be noted that this principle does not seem to be questioned by the interpreting authority (cf. DKIS interpretation of 14 June 2022, No. 0111-KDIB2-1.4010.128.2022.2.AR, available at http://sip.mf.gov.pl.). The use of this example is relevant as it illustrates a situation where an intermediary that is not the actual beneficiary of the dividend, upon receipt, transfers the dividend to another group entity – the actual beneficiary also established in the EU (EEA). As this is not the case in the present case, this issue is not discussed further.
In the opinion of the Supreme Administrative Court, a taxpayer who applies a tax preference at source was and is obliged to do so in a manner that does not constitute an abuse, and this is the situation when it makes a dividend payment to a company that does not have the status of the actual beneficiary.”
“In conclusion, the interpreting authority is correct that the payer, pursuant to Article 26(7a) in conjunction with Article 26(1) of the A.C.P., is obliged to verify the status of the recipient of the dividend, i.e. to determine whether it is the actual owner of the dividend. However, the position expressed in the interpretation should be understood to mean that the verification of this status may take place taking into account the payer’s capabilities in this respect and does not imply an obligation to conduct proceedings of the kind that the tax authorities do. This does not mean, however, that the payer is exempted from the necessity of examining whether the recipient is the actual owner, who, in the exercise of due diligence, must determine whether there are grounds for refusing to apply the exemption (Directive) or the preferential rate (PSA) in the case. This argumentation is supported by the content of Article 22c(1) of the AIA.
The burden of proof is therefore apportioned between the payer and the tax authority in such a way that the payer, acting with due diligence, is to verify whether the recipient of the dividend is its actual beneficiary. On the other hand, where the tax authority disputes the outcome of that verification on the grounds of the existence of an abusive practice, it must demonstrate the existence of the constitutive elements of such an abusive practice, taking into account all relevant elements, in particular the fact that the company to which the dividends were paid is not the actual owner of the dividends (cf. paragraph 117 of the judgment in the Danish cases).
Taking the above into account, the allegations of violation by the Court of First Instance of substantive law of Article 26(1) and Article 26(1) in conjunction with Article 22(4) of the A.P.C., as well as of Article 28b(4)(5)-(6) of the A.P.C., were deemed justified, because the Appellant, paying the dividend to the shareholder, as the payer, is obliged to verify the taxpayer’s status, i.e. to examine, with due diligence, whether the shareholder is the actual beneficiary of the dividend paid (beneficial owner). Thus, the position presented in the individual interpretation as regards the obligation to verify the taxpayer’s status is correct. However, the manner and scope of this verification must take into account the theses contained in this justification.”
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