In the judgment of 17 June 2020, Case No. I SA/Sz 65/20, the Regional Administrative Court in Szczecin indicated that the condition for the application of Art. 21 of uCIT is not the result of payments from a separate (spontaneous) legal relationship, as its grammatical interpretation indicates that the said provision refers to streams of payments from specific benefits (e.g. from trade mark rights) and not to “contracts” or “services”. This is, however, justified in the case of mixed transactions in which there are equivalent services.
The judgment was issued on the grounds of an interpretation case. A taxpayer who is a school is obliged to pay an annual fee for participation in the Educational Program, which, apart from the substantive care and quality control of teaching in accordance with the obtained certificate, also includes the right to use the school’s name and logo in promotional and information materials, identifying the unique international status of a high school, i.e. its membership in the Program. The subscription fee, which is covered by the received invoice, also applies to a number of the rights listed above, of which the school, teachers and students become beneficiaries. Thus, an intangible asset in the form of a logo is one of many values that together make up the whole of the main service, i.e. the possibility for the School to implement the International Baccalaureate Program through network membership. The remuneration – the annual subscription fee – is paid to a foreign contractor who is not a Polish tax resident and who does not have both its registered office and actual management on the territory of Poland, as well as a plant on the territory of Poland, and thus has limited tax liability as a non-resident.
The essence of the dispute therefore boils down to the answer whether the acquisition by a Party of the right to use the logo in promotional and informational materials constitutes a tax separate benefit in the form of a licence fee or whether it remains an incidental benefit of negligible importance in relation to the main benefit, which is the annual licence fee for participation in the International Baccalaureate exam programme. Therefore, resolving the dispute pending before the Court requires an assessment of the correctness of the interpretation and application of Article 21(1) of uCIT, the violation of which was claimed by the party in the remainder of the pleas in law contained in the application.
The Court held that the condition for the application of Art. 21 of uCIT is not the result of payments from a separate (spontaneous) legal relationship, because its grammatical interpretation indicates that the said provision refers to streams of payments from certain services (e.g. from trade mark rights) and not to “contracts” or “services”. Therefore, in many cases, despite the principle of freedom of contract allowing for a single price to cover services of different legal nature, if a given contract provides for actions of a foreign taxpayer subject to withholding tax, then part of the price meets the requirement to apply Article 21 of uCIT. The principle of freedom of contract cannot mean approval of the possibility to avoid withholding tax. The above is justified in the case of mixed transactions in which there are equivalent services. However, it is not permissible for such operations to be translated into mixed transactions in which the main service and the accompanying accessory services occur. Such a measure would infringe Article 21 of the uCIT, which covers only certain payments at a flat rate and sets different tax rates for different equivalent supplies.
Author – Izabela Lipka – Tax Consultant