Transfer pricing and withholding tax in Poland: when do they affect each other?

When investing in Poland, transfer pricing and WHT should be reviewed together before interest or royalties are paid to a foreign related party. An exemption or reduced withholding tax rate may apply only to the arm’s length portion.

Why do TP and WHT matter for investors in Poland?

Intra-group financing, technology and trademark licences, and intangible services are common elements of foreign investments in Poland. If a Polish company pays a related party more than it would pay an independent counterparty, the excess may result in a transfer pricing adjustment and additional WHT liability.

Under Article 21(7) of the Polish Corporate Income Tax Act, the exemption for interest and royalties is limited to the arm’s length amount. The domestic WHT rate for these payments is generally 20%.

What should be verified before payment?

A transfer pricing analysis alone is insufficient. The Polish company should also verify:

• the classification of the payment,
• a valid certificate of tax residence,
• beneficial owner status,
• compliance with due diligence,
• the applicable double taxation agreement,
• whether the pay-and-refund mechanism applies.

For specified payments between EU or EEA companies, the conditions also include at least a 25% capital relationship and generally a two-year holding period. These formal requirements do not protect the non-arm’s-length part of the payment.

Which transactions require particular attention?

The highest exposure arises in intra-group loans, cash pooling, licensing and back-to-back financing.

Interest should reflect the currency, financing period, security and the borrower’s creditworthiness. Royalties should correspond to the rights actually provided and the benefits obtained by the Polish company.

Intangible services also create risk where descriptions are generic, evidence of performance is missing or the services duplicate activities already carried out in Poland.

What changes after the PLN 2 million threshold?

Where qualifying payments to the same foreign related party exceed PLN 2 million during a tax year, the pay-and-refund mechanism may apply. It primarily covers interest, royalties and dividends.

The threshold does not confirm that a payment is at arm’s length, but it requires the correct procedural route to be selected in advance. A benchmarking analysis prepared only after year-end may be insufficient.

How can investment tax risk be reduced?

Before the first material payment, the company should classify the payment, determine the arm’s length remuneration, verify the recipient, check the PLN 2 million threshold and compile consistent supporting evidence.

The evidence package should include an agreement reflecting the actual transaction, a functional and risk analysis, an appropriate benchmark, a certificate of residence and beneficial owner documentation.

In one audit covering interest paid in 2019–2021, the company paid more than PLN 11.5 million in tax and late-payment interest after the non-arm’s-length portion was challenged. Incorrect WHT treatment may therefore materially increase the cost of doing business in Poland.

Read the full article here: Transfer pricing and withholding tax in Poland: when do they affect each other?