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Certificate of tax residence and withholding tax
Entrepreneurs transacting with foreign entities must remember the obligation to pay withholding tax. In most cases this can be avoided by relying on the relevant double taxation treaty provisions. International double taxation treaties also substantially reduce withholding tax in many cases. A certificate of residence is one of the documents needed to reduce the withholding tax liability.
Certificate of residence
The definition of a certificate of residence is found in the income tax acts. Under those definitions, it is a certificate of a taxpayer's registered office or residence for tax purposes, issued by the competent tax authority of the country where the taxpayer is based. It is therefore issued by a foreign authority, and a Polish taxpayer has no influence over its wording or form.
In practice, a certificate of residence confirms the country where a taxpayer has unlimited tax liability. As noted, there is no single certificate template. A taxpayer receiving one should check whether the document contains:
- details of the issuer (the foreign tax authority);
- the foreign counterparty's name and address;
- the counterparty's tax residence for income tax purposes;
- the date of issue and its date or period of validity.
Important
If the certificate does not specify a period of validity, it should be used for 12 consecutive months from its date of issue.Importantly, a taxpayer cannot replace it with other documents, even:
- extracts from court registers;
- extracts from business registers;
- notarised certificates;
- certificates assigning a NIP tax number.
This is true even if the documents clearly show that the entity is tax-resident in another country.
Problems with certificate validity
In many countries (such as Germany) a certificate of residence has two parts: the applicant completes one, and the authority completes the other.In the first part the applicant requests a certificate and, importantly, provides information about themselves and the types of revenue or income for which it is needed. In the second part, the foreign tax authority confirms that the applicant is a resident of that country and confirms the information entered in the first part. This is evidenced by the date, stamp and official's signature.
In many cases, the first part completed by the foreign applicant contains mistakes. Foreign taxpayers often enter incorrect dates for the period when payments are received. Although legally correct, such a certificate can result in an obligation to withhold tax: on reviewing it, the tax authority may find it valid only from its issue date until the end date entered by the applicant. It may therefore have expired when income is paid. The authority may also find that it covers only the types of income listed in its first part.
In our view, this approach is incorrect. A certificate should confirm tax residence at the time the non-resident earns income subject to withholding tax. The remitter need not physically hold the certificate at the time of payment. It can therefore be obtained even after payment, provided it confirms the foreign counterparty's residence at the time of payment. In practice, the remitter must hold the certificate at the time of a tax audit.
As emphasised above, in principle a certificate without a specified validity period is valid for 12 months from issue. The parts completed by other countries' tax authorities do not concern the period when income is accrued. It is therefore difficult to say that a certificate is valid only from issue until the time indicated by the applicant for income accrual.
However, whether a certificate of residence should apply only to the type of income the applicant specified is problematic. Polish provisions do not say that it should apply only to that income. Thus, a certificate presented by a resident of another country should be considered for all income on which withholding tax is collected, even if it states the income to which it relates.
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Change of registered office and certificate validity
Certificates are issued for a specific period. A company may change its registered office during that time. Tax provisions do not address this situation.
Example 1
A Polish taxpayer received a certificate of residence issued by the Italian tax authority. It is valid for 12 months. The applicant's registered office was in Rome when the certificate was issued. Two months later it moved to Turin. Has the certificate become invalid?In this case it has not. Changing the registered office did not change the tax jurisdiction.Tax authorities might adopt a different, broader interpretation, requiring a new certificate for every change of registered office. However, since the country of the registered office has not changed, this interpretation seems incorrect.In summary, a purposive reading indicates that the Italian counterparty's certificate confirms residence in Italy regardless of the change of address from Rome to Turin.Nevertheless, Italian provisions must also be examined to determine whether the certificate is still valid under them.Certificates of residence must therefore be checked not only against the formal requirements of Polish law, but also against the requirements in the country concerned.
Example 2
A Polish company signed a loan agreement with an entity registered in Germany. The German entity provided a certificate of residence. Three months later it moved its registered office and operations to Austria. Interest on the loan is payable every six months. Is the certificate still valid?In this case, the certificate had lost its validity when interest was paid: the taxpayer moved its registered office and thus changed its country of residence. If the lender fails to present a new certificate, the taxpayer must withhold tax. Consequently, failure by the lender to send a new certificate of residence makes the remitter liable for failure to withhold tax.
Form of the certificate of residence
In most cases the taxpayer receives the original certificate. A copy can now also be used.In many countries certificates are issued only electronically. Our authorities accept such electronic documents. An electronic certificate is comparable to our electronic KRS extracts or CEIDG certificates.Thus, the important thing now is to hold the certificate regardless of how it was issued.
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Summary
Certificates of residence issued by foreign tax authorities still cause many problems. Taxpayers often do not know whether their certificate entitles them to refrain from collecting withholding tax or to collect it at a lower rate. They need to know not only Polish regulations but often the laws of the country that issued the certificate.
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