On 29 December 2021, the Director of the National Tax Information issued an individual interpretation with ref. no. 0111-KDIB2-1.4010.441.2021.1.MK on the determination of whether the Representatives’ receivables (fee on sales) constitute receivables for advisory services, accounting, market research, legal services, advertising services, management and control, data processing, employee recruitment, and staff acquisition services, guarantees, and sureties and similar benefits (Article 21 paragraph 1 point 2a of the CIT Act). And therefore, the Company, when making a payment of remuneration, for Representatives is obliged to collect and pay a flat-rate income tax (withholding tax).
The Company (applicant) conducts business activity in producing chemical products and is a Polish tax resident. As part of its business activity, to increase sales, the Company has purchased sales intermediation services from unrelated entities operating in capital companies and having their registered office and tax residence in Romania (Representatives), without a permanent establishment or branch in Poland. The task of the Representatives to represent the Company on the market for the Company to develop the sale of its products, i.e., establishing contact with potential customers and acquiring new orders for the Company’s products (negotiations with customers, development of product sales, sending customer orders, providing information about products and offers Companies). Representatives may also monitor the market situation and inform the Company about its changes. The general function of the Representative is to initiate transactions between the Company and clients and maintain business relations between the Company and clients. As part of their activities, representatives consider the Company’s marketing and sales strategy. As part of the transaction, the Representatives do not become the owners of the goods they mediate (the Company is a party to the sales contract, decides on the commercial terms of the transaction, and remains the owner of the products). In particular, Representatives are entities exclusively initiating the conclusion of transactions by the Company and the client or acting as the Company’s proxies. Representatives charge the Company for the service provided with a fee calculated based on sales made in a given settlement period. Thus, the remuneration due to the Representatives and its amount depends solely on the deal made by the Company. In the Company’s opinion, the Revenues of Contractors generated in Poland from cooperation with the Company should not be subject to tax in Poland.
Against this background, the Company wants to obtain knowledge whether, in the presented factual situation / future event, the services purchased by you from a foreign entity, i.e., Representatives, fall within the catalog of services indicated in Article 21 paragraph 1 point 2a of the CIT Act.
About certain incomes obtained on the territory of the Republic of Poland by foreign entities, the obligation to deduct tax rests with the Polish entity making the payment of the receivables that are the source of this income (Article 21 paragraph 1 point 2a of the CIT Act). Based on tax law, the principle is that the type of transaction is determined not by the name given by the parties but by the actual nature of the transaction. As a result, the content of the activity determines the qualification for a specific type of service.
The tax authority approves that any legal provision (legal text) must be subject to an interpretation process to understand it (determine its content), regardless of the degree of prima facie understanding. And the fact that the doctrine takes precedence over other types of interpretation, i.e., systemic and teleological. Only in exceptional situations may the literal wording of the provision be departed from. In the present case, it is essential to understand the meaning of the terms intermediation services, consultancy services, market research services, advertising services, management and control services, and data processing services.
In the opinion of the Authority, the services purchased from the Representatives indicated in the application undoubtedly bear several features characteristic of the services listed in the provision of Article 21 CIT Act. The features of these services outweigh the elements typical of other services (depending on the detailed scope of activities used to perform the service in question). In the context of the specificity of economic activity, the services in question are services similar to advertising, consulting, and market research services. The revenues generated by the Representatives on account of the services described in the application are subject to withholding tax in Poland.
A different position is taken by the judicial authorities, which approve that services consisting in supporting the sale of products do not fall within the catalog of services referred to in Article 21 paragraph 1 of the CIT Act. This position of the court is presented by the judgments of the Provincial Administrative Court in Gdańsk with reference no. ISA/Gd 543/19 of 29 May 2019 or I SA/Gd 2106/19 of 17 June 2020.
In the factual situation presented in the interpretation, the receivables did not exceed (will not exceed) a total amount of PLN 2 million per year for individual Representatives. Consequently, when making the payment of remuneration to the Representatives, with due diligence and possession of current certificates of residence, the Company will not be obliged to collect withholding tax according to Article 7 paragraph 1 of the double-taxation agreement with Romania.
Author: Marta Kiryczuk – Tax Consultant