According to Article 21, section 1 of the Corporate Income Tax Act, “the use or right to use an industrial device, including a means of transport, commercial or scientific device” falls within the subject scope of withholding tax.
Therefore, as a rule, receivables paid by entities subject to tax on their total income, regardless of where they are earned (unlimited tax obligation) to non-residents on this account should be subject to withholding tax.
It should be noted that the term “industrial equipment” is used both in the double taxation conventions and in the Corporate Income Tax Act. In accordance with the content of international agreements, the terms used in them, which have not been defined in them, should be given such meaning as is adopted at the time in accordance with the law of that State with regard to taxes to which the agreement applies.
However, the absence of a definition of the legal concept of ‘industrial equipment’ has given rise to divergences in the case-law of administrative courts and tax authorities and, in particular, to serious doubts on the part of payers and taxpayers.
How to understand the term “industrial equipment” in practice?
When interpreting the term “industrial equipment”, reference should be made to the position of the doctrine and case-law according to which it should be assumed that the term “industrial equpment” (similarly to commercial or scientific) is a general formulation, including all possible devices, constituting a certain set of mechanisms, technical elements which may be applied in the activities of entities with specific characteristics – industrial, commercial or scientific (the NSA’s jurisprudence has granted the status of an industrial device to e.g. cars, semi-trailers, airplanes, excavators, containers, tanks – yes: among others, the judgments of the NSA of December 6, 1996, file no. III SA 1091/94, of 12 January 1996, file no. SA/Ka 2296/94, of 16 May 1995, file no. SA/Sz 183/95).
The term ‘industrial’ or ‘commercial’ equipment’ should be understood as a type of mechanism or assembly of components or instruments used to carry out certain commercial activities in the course of an economic activity, facilitating material work in a broad sense or the process of selling goods and services. There is no doubt that all economic activities, i.e. construction, industry, commerce, science, are commercial and profit-making. The term ‘industrial, commercial equipment’ should be understood autonomously, taking into account the objective which the legislator wanted to achieve. It cannot therefore be considered that the legislature’s objective was to exclude from the scope of the provision in question the taxation of payments for the use of construction equipment. When interpreting the term ‘industrial equipment’, it is necessary to take into account the whole phrase referring to that concept and the way it is inserted in the wording of the sentence.
Moreover, the case-law expresses the view that a broad interpretation of the concept in question should be regarded as incorrect: “industrial equipment?- The understanding of this concept cannot omit the adjective “industrial” and extend its scope to any other sector of the economy.
In that regard, it must be held that the provision of Article 21(1)(1) of the UCIT does not apply to every piece of equipment, but only to that which is industrial in nature.
It follows from the above that all machinery used for certain activities, facilitating work and used in industry constitutes industrial equipment and that construction machinery and equipment, including e.g. excavators, hoists, containers or tanks, also fall within the scope of the term ‘industrial equipment’.
Author: Izabela Lipka – Tax consultant