Master File and Withholding Tax (WHT). What does a Polish company in an international group need to know?

The Master File is increasingly becoming a key document in tax audits relating to withholding tax in Poland. Learn about the risks it may present and how a Polish company within an international group can ensure compliance with local regulations to avoid WHT issues. 

In many international groups, the group transfer pricing documentation (MF, Master File) has traditionally been treated solely as a document for “transfer pricing” purposes, prepared centrally and provided to local companies merely to fulfill a formal documentation obligation. Current practice in Poland shows that such an approach may lead to adverse consequences. The Master File is increasingly being analysed by the tax authorities also in proceedings relating to other taxes, in particular withholding tax (WHT). Simplifications in the description of the group structure, functions, financing models or intellectual property (IP) – acceptable from the perspective of a “global” business description – may, from the perspective of the Polish company acting as the WHT remitter, create  significant tax risks. 

Master File in the Polish environment – a “group” document that operates locally 

From the perspective of the Polish company, it is important to note that: 

• the Master File must be prepared within 12 months after the end of the tax year; 

• the document may be prepared in English, provided that it complies with Polish transfer pricing documentation regulations; 

• in many groups the Master File is prepared by headquarters and then passed on to the Polish company, often without its significant involvement in the process. 

Such an approach was acceptable for a long time because group transfer pricing documentation was rarely subject to detailed audits in Poland. However, the current practice of the tax administration in the WHT area means that a local Polish company can no longer treat the Master File merely as a “global attachment” to the local transfer pricing documentation. This documentation is increasingly shaping”the tax authorities’ perception of the taxpayer – not only in the area of transfer pricing, but also in the context of withholding tax. 

Why the Master File is becoming crucial for WHT in Poland 

During WHT tax audits, Polish tax authorities are increasingly requesting not only local documentation but also group documentation. On the one hand, this seems obvious, as it is a complementary element of the documentation. However, importantly, the Master File contains information not only about the Polish WHT remitter but also about the entire group. The Polish tax authorities increasingly using the group documentation as the basis for conclusions regarding: 

• the ownership structure of the group; 

• the functions performed by individual companies in the group and the location of key economic decisions; 

• financing models (loans, on-lending, cash-pooling) and licensing arrangements; 

• which entity bears the actual risk associated with particular payments and which entity in the group has decision-making autonomy regarding individual payments. 

From a WHT perspective, the Master File therefore becomes one of the key sources of information considered by the tax authorities when assessing whether: 

• the recipient of the payment qualifies as its beneficial owner (BO); 

• the application of a WHT exemption or a DTT reduced rate is justified. 

Key risk areas – when the Master File “fails to keep up” with reality 

As the use of the Master File in withholding tax proceedings increases, so does the importance of the precision and timeliness of the information contained within the document. 

• Simplified description of structure and functions 

Based on excessive simplifications in the Master File, the tax authorities may challenge the beneficial ownership (BO) status of the entity receiving payments, which could result in the rejection of exemptions or reduced treaty rate. 

• Incorrectly defined roles of entities 

Incorrectly defined roles of entities within the Group from a transfer pricing perspective may lead to an incorrect method of calculating and/or verifying transfer prices, but may also result in challenging the BO status of a given entity for WHT purposes. 

• Incorrectly defined nature of the transaction 

The Master File may fail to reflect the actual nature of the transaction (e.g. loan vs on-lending), which could become an issue during a tax audit and, from a transfer pricing perspective, generate a risk of recharacterisation. The recharacterisation of a transaction may also have consequences for WHT and the liability of the Polish remitter for unpaid tax. 

• Discrepancies between the Master File and the Local File 

Particular caution is required for documentation that has been prepared annually over the years. In some cases where updates to the Master File reflect significant changes in the group’s business model but do not always keep pace with modifications to financial flows or licensing arrangements that are relevant for WHT. Besides WHT risks, there is also an increased risk of discrepancies with local documentation, which captures even minor changes because it focuses on specific transactions. Any discrepancies undermine the quality and reliability of the documentation, which is additionally sanctioned under the Fiscal Penal Code. 

Key challenges for the Polish local company 

When the Group’s headquarters are located abroad, decisions regarding the content of the Master File are usually made outside of Poland. From the perspective of the local company – the WHT remitter – this creates specific challenges: 

• lack of control over the narrative, regarding the role of entities paying dividends, interest, and royalties; 

• limited influence over the description of the business substance of entities receiving payments from Poland including their roles and risks borne; 

• the risk that the Master File contains simplifications agreed at the global level that may raise concerns and questions from the Polish authorities. 

In practice, if during a withholding tax audit the tax authority relies on the Master File, the local Polish company must explain any inconsistencies, even though it did not have a decisive influence over the original version of the document. 

Why a local review of the Master File is necessary 

The risks and challenges outlined above lead to one clear conclusion: the Master File should not operate in isolation from the local tax reality, particularly when the Polish company acts as a withholding tax remitter. 

Although it is not always possible for local companies to play an active role in preparing group documentation, what they can and should always do is to conduct a detailed review immediately after receiving such documentation from the Group, identifying any “hidden” risks, both in transfer pricing and other taxes, with particular emphasis on WHT. 

From the perspective of the Polish company, it is crucial that: 

• the content of the Master File reflects the actual group structure and the real nature of transactions (e.g. loan vs on-lending); 

• descriptions of the roles and functions of entities receiving payments from Poland are consistent with the arguments used in the WHT area; 

• information on income allocation and ownership within the group remains consistent with the local understanding of who is the beneficial owner of each payment stream for WHT purposes; 

• the Master File consider local aspects related to the application of WHT exemptions and reduced rates under double tax treaties. 

Without such a review, the Master File – instead of supporting the Polish company during proceedings – may become a document used by the authorities to challenge the WHT preferences applied. 

Practical actions for the Polish company – the WHT remitter 

Involving the Polish local company in the process of reviewing and updating the Master File, even at the final stage of preparing this documentation, with explicit consideration of the withholding tax perspective, is becoming a essential element of tax risk management. 

From the perspective of management boards and tax departments of Polish companies belonging to international capital groups, the key actions to streamline the Master File and WHT area are: 

1. 1. Review of group documentation “through the eyes of the WHT remitter”. 
   2. Comparison of group documentation (Master File) with local documentation (Local File) and actual settlement practices. 
   3. Identification of areas in which the description in the Master File is too general or outdated. 
   4. Submitting comments to headquarters and updating the Master File. 
   5. Ensuring alignment with due diligence procedures. 

If the group document describes the structure in a simplified or outdated manner, the Polish withholding tax remitter faces the risk that during an audit, this document will be treated as the “objective” picture of the business model, while local explanations will be viewed merely as attempts to adjust the narrative to expected tax outcomes. 

For most taxpayers in Poland required to prepare a Master File, December is the last moment to prepare such documentation – it is worth using this time wisely to ensure it does not become a “time-bomb”.