The Tax You Pay for Someone Else
Most taxes operate on simple logic: you earn, you pay. Withholding tax reverses the principle. You pay a foreign entity—but you must deduct the tax and remit it to the Polish treasury. You pay for someone who may not even know they are being taxed in Poland. This can happen with dividends, royalties, interest.
The construction makes sense from the state’s perspective: easier to collect tax from a Polish company than to chase a foreign service provider. But from the entrepreneur’s perspective, it is a trap with a delayed trigger. An error made today—failing to withhold, withholding the wrong amount, lacking proper documentation—will surface years later, during an audit, with interest and penalties attached.
Why Withholding Tax Is So Complicated
WHT sounds simple: you pay abroad, you withhold tax. But the devil lurks in every element of that sentence.
What does “pay abroad” mean? Is a service provided by a Polish subsidiary of a foreign corporation a foreign payment? Is a software license purchased online from a Delaware company subject to WHT? What about interest paid to a bank headquartered in Luxembourg but operating through a Polish branch? Each of these questions has a different answer.
What rate applies? It depends on the type of payment. Dividends carry a different rate than interest. Interest differs from royalties. Royalties differ from advisory services. And IT services? That depends on whether you are purchasing a technical service, a license, or perhaps exercising copyright. The boundaries between these categories are blurred; the consequences of misclassification are sharp.
Can you pay less? Often, yes—double taxation treaties provide for reduced rates or complete exemptions. But to benefit from them, you must meet conditions. Have the counterparty’s certificate of residence. Verify that they are the beneficial owner of the payment. Exercise due diligence. Each of these requirements has its own definition, its own documentation, its own pitfalls.
Beneficial Owner: The Concept That Changes Everything
For several years now, Polish tax law has operated with the concept of the “beneficial owner” of payments. It is not enough that your counterparty is resident in a country with a favorable tax treaty. You must establish whether they are the true beneficiary of the payment—or merely an intermediary through which money flows onward. In this context, an audit of the foreign company’s business substance becomes essential.
What’s in the Crosshairs
The Minister of Finance makes no secret of where he is looking. Warnings published by the ministry point directly to:
Payments to countries with “harmful tax policies”—the list is long and changes.
Payments to low-tax jurisdictions—Cyprus, Malta, the Marshall Islands, but not only these. Any jurisdiction where the effective rate is markedly lower than Poland’s.
Complex international structures—the more levels, the more countries, the greater the risk of attracting the tax authority’s interest.
Payments to related parties—intragroup transactions are always under scrutiny.
Changes in ownership—if shares in a company have recently passed to a resident of a “favorable” jurisdiction, an audit is almost certain.
These are not theoretical threats. This is the list of audit priorities.
What We Do
Audit—review of foreign payments, identification of those subject to WHT, verification of the correctness of past filings.
Classification—analysis of specific payments and determination of the proper rate, taking into account international treaties and preference conditions.
Procedures—implementation of processes for verifying counterparties, gathering documentation, exercising due diligence.
Contracts—review and negotiation of agreements with foreign counterparties to optimize WHT classification.
Representation—defense in audits and disputes concerning WHT.
The Price of Error
WHT is an area where mistakes are expensive. Tax not withheld—you pay from your own pocket, because you will not recover it from the counterparty. Wrong rate applied—you pay the difference with interest. Missing documentation—you lose the right to a preference, even if you were materially entitled to it.
And then there is personal liability. Board members are responsible for a company’s tax obligations when enforcement against the company’s assets proves ineffective. In the case of WHT, this liability is not theoretical—it is a real risk that grows with every unverified payment.
The system is constructed such that it is safer to pay more and seek a refund than to pay less and risk an assessment with penalties. This is absurd, but it is the reality in which Polish companies conducting international business operate.
