Economic power in light of the WHT Explanations – is this the end of uncertainty?

On 9 July 2025, the Minister of Finance published the long-awaited tax explanatory notes regarding so-called beneficial owner clause for withholding tax purposes (hereinafter: WHT Explanatory Notes). Their publication is of significant importance for withholding tax remitters and taxpayers who, since 2022, have been and continue to be particularly exposed to increased controls and proceedings in the area of foreign payments and are struggling with legal uncertainty and the lack of consistency in the practices of tax authorities in this area.

In a series of publications, we will look at selected aspects of the WHT Explanatory Notes. First, we will focus on the issue of economic power, which is the core of the concept of the beneficial owner and is the subject of a dispute with the tax authorities.

How is economic power understood in the WHT Explanatory Notes?

In order for the recipient of a given payment to be considered its beneficial owner, the following conditions must be met cumulatively:

• receiving a given receivable for one’s own benefit,
• no obligation to transfer all or part of the receivables,
• conducting a genuine business activity.

According to the WHT Explanatory Notes, the first two conditions should be understood together as economic power over the given payment. The last condition refers to the so-called economic substance.

Contrary to what one might think, it is not at all easy to prove economic control over a given payment.

The approach of courts and tax authorities in this regard has evolved from an initial legal understanding to the current economic understanding in a very broad sense.

Economic power means that

• the entity receiving the payment should be able to freely decide how the funds received will be used;
• it should actually and effectively use the payment received, including reinvesting it.

From this perspective, ‘back to back’ financing may give rise to the risk of being challenged by tax authorities.

The WHT Explanatory Notes referring to economic power indicate that this concept should be applied to a specific payment. In practice, this means that it is possible to have economic power over a dividend received, while at the same time not having it, for example, in relation to interest received.

It is disappointing that the WHT Explanatory Notes have left many important issues unclear, which may continue to be flashpoints for new disputes with tax authorities.

Intermediary – i.e. who does not have economic power

According to the WHT Explanatory Notes, entities that do not have full freedom to dispose of the amounts received cannot be considered the beneficial owners. Restrictions on the full freedom to dispose of payments may result from both contractual (formal) provisions and factual circumstances, determined on the basis of a comprehensive analysis of the facts.

Consequently, an entity that receives a receivable solely for the purpose of transferring it to another entity should be considered an entity without economic power, also known as an intermediary. An entity that transfers a receivable in a form other than that in which it received it may be considered an intermediary.

According to the WHT Explanatory Notes, an entity with one or more of the following characteristics should be considered an intermediary:

• realising a small margin on the payments transferred;
• not reporting taxable income from the receivables received;
• transfers receivables at short intervals to another entity;
• not reinvesting the funds obtained in connection with the receivables received;
• has no other means or sources of income other than the receivable received to enable it to repay its liabilities;
• does not bear the risk associated with the receivable.

The Minister of Finance has stipulated that the above list is exemplary, as it is impossible to create a complete catalogue of the characteristics of an intermediary entity.

The above list of criteria still does not provide tax remitters and taxpayers with a clear answer as to what characteristics an intermediary entity and a non-intermediary entity have. The list of characteristics of an intermediary indicated in the Explanatory Notes uses general terms that have not been defined. Therefore, there are still no clear guidelines as to what should be understood by terms such as ‘small margin’ or ‘short intervals’. It can therefore be assumed that numerous disputes will continue to arise in this context.

Despite the fact that the WHT Explanatory Notes explicitly pointed to the specific nature of financial and holding companies and the need to examine such entities using criteria different from those applied to manufacturing or service companies, it seems that this difference has not been taken into account in the above catalogue of characteristics of entities which will be considered as not having economic control over the payment. The income of holding or financial companies is precisely the funds obtained from their subsidiaries or borrowers. Therefore, in most cases, such entities will not have other sources of income to repay their own liabilities.

An important guideline for taxpayers is the requirement to reinvest the payments received. Reinvestment may consist in granting loans to other companies within the group or using the amounts received to purchase an asset. Thus, taxpayers and withholding tax remitters should pay particular attention to how the payments received are used and to the proper documentation of such activities.

Causal link between the receipt of a payment and its further distribution

The WHT explanations indicated that the existence of an obligation to transfer the amounts received should be verified in relation to a specific payment. Such an obligation must also be directly related to that payment. Therefore, in order to apply the exemption or a lower withholding tax rate, it must be determined whether there is a direct link between the receipt of the amount and its further distribution.

It should be emphasised that the WHT explanations refer in this regard to the Commentary on Article 10 of the OECD Model Convention (and the corresponding passages of the Commentary on Articles 11 and 12 of the OECD Model Convention), which indicates that the further payment of amounts due by the taxpayer is to be conditional upon their prior receipt.

Therefore it seems that the issue of the obligation to transfer the amounts received should be examined at the time of payment by the Polish entity to the foreign entity. Thus, an entity may be considered an intermediary if it was aware at the time of obtaining the receivables that the amount would have to be subsequently transferred to another entity, and this payment depended on the taxpayer’s prior acquisition of funds from the tax remitter.

In this respect, there is a noticeable contradiction in the WHT Explanatory Notes – on the one hand, they clearly indicate that the status of the beneficial owner should be examined at the time of payment of the receivables, while on the other hand, in the example concerning dividends (Example No. 1, p. 9 of the WHT Explanations) indicate that when examining economic control, one should take into account the payments made by the taxpayer in previous years and the exercise of economic control over them. Thus, it is not entirely clear whether previous payments actually affect the status of the beneficial owner or whether it should be examined in relation to each payment.

We believe that entities which, after receiving a payment, only then analysed how to use it – whether for reinvestment or to repay their own liabilities – should not be considered intermediaries. This is because there is no such relationship, directness or dependence between the receipt of payments and their further distribution which, in the light of the WHT Explanatory Notes, would indicate the status of an intermediary.

Exemptions

The WHT Explanatory Notes explicitly indicate the circumstances which mean that an entity is not an intermediary, i.e. those which do not deprive it of its status as the beneficial owner. This should be assessed positively, as it is a clear response to the previous worrying practice of the tax authorities.

First, the WHT Explanatory Notes pointed to the systemic regulations applicable in individual countries concerning groups of companies, such as profit transfer agreements in the German legal system. The WHT Explanatory Notes explicitly stated that payments under such agreements do not mean that the taxpayer is an intermediary in relation to the payments received.

In addition, the WHT Explanatory Notes explicitly pointed out that a company cannot be regarded as an intermediary when its investors are persons who would not be entitled to withholding tax relief if they received the payment directly. In practice, we have often encountered this position of tax authorities, which viewed the company receiving the payment as merely an intermediary for the purpose of benefiting from preferential taxation of receivables.

However, it should be noted that the WHT Explanatory Notes stipulate at the outset that each factual situation may be assessed under Article 22c of the CIT Act, i.e. in terms of abuse of law. It cannot therefore be ruled out that the tax authorities may consider that a structure created in accordance with the WHT Explanatory Notes will be deemed to be circumvention of the law.

Summary

The WHT Explanatory Notes undoubtedly leave room for improvement in explaining the concept of economic power. Their imprecision, which manifests itself in numerous undefined terms, has not dispelled all doubts of taxpayers and tax remitters regarding withholding tax. As a result, the WHT Explanatory Notes do not provide the much-awaited stability. It can therefore be assumed that the manner in which the aspect of economic power is explained in the WHT Explanatory Notes will continue to be a source of disputes with the tax authorities.