When does pay & refund actually apply?

One of the most common misunderstandings in discussions about Polish withholding tax is the conflation of two things that are related but not identical. The first is the general scope of Polish WHT – the catalogue of payments in respect of which Poland levies withholding tax. The second is the specific pay & refund mechanism – a special collection and potential refund procedure that is triggered once a defined threshold has been crossed.

The distinction has very practical significance. Each of these matters is governed by its own rules, applies to different parties, and generates different obligations. Confusing them leads either to unwarranted alarm (“pay & refund applies to every payment abroad“) or to false reassurance (“since I don’t have pay & refund, WHT doesn’t concern me“).

What Polish WHT covers – the general scope

Polish WHT covers a broad catalogue of payments made by Polish taxpayers to non-residents. The primary legal bases are Article 21(1) and Article 22(1) of the Corporate Income Tax Act.

Article 22(1) covers dividends and other income from participation in the profits of legal entities. The standard rate is 19%.

Article 21(1) covers a range of other categories:

• interest, including on loans and credit facilities (rate: 20%),
• royalties: copyright, trademarks, designs, patents, know-how, software, and the use of industrial and commercial equipment (rate: 20%),
• payments for activities of a performance, entertainment, or sporting nature (rate: 20%),
• and – and this is where Poland’s specificity begins – advisory, accounting, market research, legal, advertising, management and control, data processing, recruitment, guarantee and surety services, and services of a similar nature (rate: 20%).

This last category is unusual by European standards. The Interest and Royalties Directive does not cover services. The OECD Model Tax Convention generally attributes the right to tax service income to the country of residence of the service provider. Poland retains its own right to tax these services at source – a right that may (but does not always) be overridden by a specific double tax treaty.

This means that the scope of Polish WHT is broader than in many other EU member states — and that the analysis must extend beyond dividends, interest, and royalties to encompass management fees, advisory services, compliance, IT, and HR charges. These will be addressed separately in subsequent episodes.

What is the pay & refund mechanism and what exactly does it cover?

The pay & refund mechanism is a specific procedure set out in Article 26(2e) of the Corporate Income Tax Act. The provision states that where the total amount of payments made to the same taxpayer in respect of the categories referred to in Article 21(1)(1) (in particular, interest and royalties) and Article 22(1) (dividends) exceeds PLN 2,000,000 in a tax year, the payer is obligated to withhold tax at the standard rate on the excess above that threshold.

Importantly, the scope of this mechanism is narrower than the general catalogue of payments subject to withholding tax. Pay & refund applies exclusively to passive payments – primarily dividends, interest, and royalties. It does not, however, apply to intangible services listed in Article 21(1)(2a) of the Corporate Income Tax Act, even though such services may be subject to withholding tax under the general rules.

In practice, this means that although intangible services require a case-by-case WHT analysis (in particular in the context of the applicable double tax treaty), they are not subject to the pay & refund mechanism and are not captured by the PLN 2,000,000 threshold (provided the payment is not classified as a royalty or another category falling under Article 21(1)(1) of the Corporate Income Tax Act). As a result, the practical risk burden associated with this mechanism is concentrated on passive payments – which are also the payments most likely to qualify for exemptions or preferences under EU directives and double tax treaties.

The PLN 2 million threshold – how is it calculated?

The PLN 2,000,000 threshold is calculated:

• separately for each taxpayer (each foreign recipient),
• by reference to the payer’s tax year (not the calendar year, where the tax year differs), and
• on an aggregate basis across all categories of payments referred to in Article 21(1)(1) and Article 22(1) made to the same entity.

The last point is particularly important. If a Polish company pays the same foreign parent company a dividend (e.g., PLN 1.5 million) and interest on a group loan (e.g., PLN 0.8 million), the aggregate amount is PLN 2.3 million and the threshold is crossed – regardless of the fact that neither category individually exceeds it.

The threshold is not an annual aggregate across all recipients – it is assessed individually for each taxpayer. If a company pays dividends to ten different foreign shareholders of PLN 500,000 each, no threshold is crossed, even if the total payments amount to PLN 5 million.

What happens below the threshold?

Below the PLN 2 million threshold, the payer may, as a general rule, apply WHT preferences (an exemption or a reduced rate) directly at the time of payment. There is no requirement to submit a WH-OSC declaration or to obtain an opinion on the application of the preference.

This does not mean, however, that preferences may be applied automatically. The regulations impose on the payer an obligation to exercise due diligence in verifying that the conditions for their application are met. A tax residency certificate constitutes only the basic element of the documentary package and is, as a general rule, insufficient on its own to substantiate entitlement to an exemption or reduced rate.

Below the threshold, there is no pay & refund mechanism in the technical sense. But the general WHT obligation applies from the very first zloty. If the conditions for a preference are not met, tax must be withheld regardless of the amount involved.

This means that the belief that “we’re below PLN 2 million, so we have no problem” is mistaken. There may still be a problem – it simply requires a different approach.

Two pathways above the threshold

Once the PLN 2 million threshold has been crossed, the payer has two options for applying a preference:

• The first: submission of a WH-OSC declaration. The payer, represented by the head of the entity, declares that it has carried out verification with due diligence and that the conditions for the preference are satisfied.
• The second: obtaining an opinion on the application of the preference. The tax authority, upon application by the taxpayer or the payer, analyzes the situation and confirms (or declines to confirm) that the preference is available. The procedure takes up to six months in theory — in practice, applicants tend to wait nearly twice as long on average.

Further detail on both procedures will be provided in subsequent episodes.

If the payer does not avail itself of either pathway, it should withhold tax at the standard rate, remit the funds to the tax office, and the foreign taxpayer may subsequently apply for a refund.

A practical map for every company

Before a Polish company begins analyzing which pathway is appropriate in its specific situation, it is worth addressing a number of preliminary questions:

• What categories of payments were made abroad in the last tax year? (dividends, interest, royalties, services, other?)
• To how many different foreign entities?
• What was the aggregate amount paid to each such entity?
• Did any of those entities exceed the PLN 2 million threshold?
• Were preferences applied? On what basis?
• What documentation exists?

This is the map that should be in place before any discussion begins about whether a WH-OSC is needed or whether a tax residency certificate will suffice. In every company, this map looks somewhat different — and it is from this starting point that the choice of instruments actually needed should be determined.

Understanding this framework is the foundation for everything that follows.