Practical significance of the explanations of 3 July 2025 concerning WHT in relation to the LTA concept

The tax explanations concerning the application of the beneficial owner (BO) clause significantly clarify and, we hope, will facilitate the application of the look-through approach (LTA).

The application of the LTA may prove crucial for international capital groups where WHT-taxable receivables are transferred in a payment chain between several related entities.

What is the LTA concept?

The LTA is a concept that allows the WHT payer to identify the beneficial owner of the payment not at the level of the direct recipient of the payment, but at a further stage of the structure.

This is particularly important in the case of corporate group structures where financial flows may be challenged through companies that do not necessarily meet the BO criterion. Thanks to the LTA, it is possible to bypass such entities and apply the tax preferences available to the final recipient of these payments, provided that they meet certain conditions, including the beneficial ownership requirements.

Under the LTA, WHT payers may apply tax preferences covering both exemptions provided for in Article 21(3) and Article 22(4) of the CIT Act (implemented from the Parent & Subsidiary and Interest & Royalties Directives), as well as reduced WHT rates resulting from double taxation agreements (UPO) to which Poland is a party.

When can the LTA be applied?

The LTA may be applied to payments of dividends, interest and royalties, provided that the following requirements are met:

1. 1. The type of payment remains the same at every stage of the payment chain (e.g. interest is transferred as interest). However, the amounts transferred between individual entities do not have to be identical.
   2. The final recipient meets the conditions for the given preference under the CIT Act or the relevant UPO agreement, including the criteria for recognition as the beneficial owner.
   3. Where the Parent & Subsidiary Directive applies, the final recipient of the payment is subject to taxation in the EU/EEA or the dividend is taxed at least once in the EU/EEA.
   4. For payments of royalties and interest, in each Member State within the payment chain, the recipient of the payment is subject to effective taxation in accordance with the objectives of the Interest & Royalties Directive.
   5. In order to benefit from the WHT exemption, the final recipient does not need to have a direct shareholding in the capital of the first entity in the payment chain. The condition of direct shareholding is also considered to be met if all entities in the cascade have a direct shareholding in the capital of the next company in the payment chain.

When verifying the conditions for applying the LTA, a separate analysis and assessment should be carried out for the purposes of applying the exemptions under the PS/IR Directives and UPO agreements, taking into account the significant differences in the objectives and scope of these legal acts and the resulting WHT preferences. Importantly, the analysis should be carried out separately for each payment, taking into account its individual circumstances.

What to look out for in the context of LTA application

The application of the LTA is a right of the payer, who may request the tax authority to take into account the indicated tax preferences by referring to this concept and presenting documentation confirming that the required conditions are met. On the other hand, the tax authority is not obliged to apply the LTA on its own initiative due to a lack of extensive knowledge of how a given capital group operates.

The explanations exclude the possibility of applying the LTA in conjunction with the concept of split substrate or extended scope of the beneficial owner test.

The LTA and the payer’s obligations in the area of WHT Compliance

WHT compliance refers to a set of actions and obligations that a WHT payer (an entity paying amounts to a non-resident) should take in order to correctly account for this tax. These actions include, among others:

1. 1. determining the type of payments made and assessing whether they are subject to WHT,
   2. determining in which country the payment recipient is established or resides for tax purposes,
   3. verifying the conditions for applicable tax preferences (exemptions or reduced WHT rates resulting from the relevant UPO agreement or provisions implementing EU Directives),
   4. examining the status of the payment recipient as the beneficial owner of the payments (in the case of certain types of payments),
   5. examining other conditions for the application of a given tax preference (e.g. capital share requirements),
   6. keeping records and collecting relevant documentation confirming that the conditions for applying preferential WHT taxation are met,
   7. collecting WHT and paying it to the competent tax office on time,
   8. submitting a tax return and fulfilling information obligations.

The application of the LTA will significantly affect the scope of the payer’s obligations related to WHT compliance. In this context, verifying that the conditions for applying tax preferences under WHT are met and documenting them becomes more complex.

A payer who decides to apply the LTA should, as part of its due diligence, identify all entities in the payment chain involved in transferring the amount due to the final recipient and, depending on the tax preference applied, additionally verify, among other things:

1. 1. whether the final recipient of the receivable meets the conditions for being considered the beneficial owner,
   2. whether the beneficial owner recognises the tax revenue from the receipt of this receivable in their country of residence,
   3. whether the receivable transferred between successive entities in the chain retains the same character (e.g. as an interest payment),
   4. whether the entities in the payment chain are resident for tax purposes in the same EU country as the beneficial owner or in other countries,
   5. whether all entities intermediating in the transfer of payments meet the cascade condition of direct ownership of a specified share in the capital of the next company in the chain or are sister companies.

One of the key elements of WHT compliance when applying the LTA is the collection and analysis of relevant documentation. This documentation should confirm that the application of the LTA in the given circumstances is justified and that all conditions for benefiting from the exemption under the EU PS/IR Directives (implemented in the CIT Act) or the preferential WHT rate under the relevant DTT have been met.

When applying WHT preferences based on the LTA, it is worth analysing the following documents:

1. 1. organisational chart of the capital group, including the ownership structure,
   2. agreements concluded between individual entities in the payment chain, confirming the nature of the payments made and the obligation to transfer these amounts (e.g. loan agreements, licence agreements, other agreements),
   3. bank statements confirming the execution of payments between entities in the chain and their nature,
   4. certificates of residence of all entities in the chain and extracts from relevant commercial registers,
   5. statements from individual entities in the payment chain confirming their status as intermediaries in the transfer of receivables,
   6. statements from the final recipient and other required documents confirming that the conditions for recognising them as the beneficial owner of the receivables have been met,
   7. financial statements of individual entities in the payment chain, showing their financial situation and cash flows,
   8. tax returns or decisions of tax authorities confirming the taxation of the receivables received by the beneficial owner in their country of residence,
   9. transfer pricing documentation confirming that the transactions between successive entities in the chain were concluded on market terms,
   10. business justifications for the existence of a cascading financing structure.

The LTA and exemption for foreign investment funds

The LTA is particularly important in structures where an investment fund is at the top of a capital group. In such a scenario, the fund may turn out to be the ultimate recipient of the payment (and potentially its beneficial owner). This opens up the possibility of applying a specific exemption for investment funds provided for in the CIT Act.

This is a particularly dynamic area, as the Ministry of Finance is working on amending these provisions. In June 2025, a draft bill was published with the aim of aligning Polish regulations with two key judgments of the Court of Justice of the European Union. The main changes proposed are:

1. 1. extension of the exemption to funds from third countries (outside the EU/EEA), which is an implementation of the judgment in case C-190/12 (Emerging Markets),
   2. allowing an exemption for internally managed funds (so-called self-managed funds), which follows from the judgment in case C-18/23.

Although the new tax explanations describe in detail the LTA rules for dividends and interest under the EU directives and the UPO, they do not directly refer to a scenario where an investment fund is at the end of the payment chain.

In order for a fund to be eligible for the exemption, the payer must confirm that it meets all of the following conditions (please note that some of these will change after the amendment comes into force):

1. 1. It operates as an open-ended or closed-ended collective investment undertaking (with specific investment restrictions),
   2. It has its registered office in a Member State of the European Union or the European Economic Area,
   3. It is subject to taxation on its total income in the country of its registered office,
   4. Its activities are subject to direct supervision by the competent financial market supervisory authorities,
   5. It has a depositary holding its assets,
   6. It is managed by entities authorised by the supervisory authorities,
   7. Its sole activity is the collective investment of funds,
   8. There is a legal basis for the exchange of tax information between Poland and the country where the fund is established.

As can be seen, the list of conditions is long and requires detailed analysis. The process of verifying their fulfilment by the payer is therefore another highly specialised task that should be included in the scope of WHT Compliance.

Benefits and challenges of applying the LTA

From a practical point of view, the LTA can significantly simplify tax settlements in cross-border structures. In many capital groups, financial flows are directed by companies that do not always have the required economic substance.

Thanks to the LTA, it is possible to bypass such entities when assessing whether the conditions for applying preferences are met and to reach the beneficial owner – not only the parent company entitled to standard preferences, but also the investment fund that can benefit from a separate exemption. As a result, the payer may apply, for example, a WHT exemption or a reduced rate, which will translate into greater stability and uniformity of settlements. However, it is necessary for the payer to be able to adequately document the entire payment path and the status of the final recipient.

The application of the LTA opens up new opportunities for payers in Poland, but also presents them with specific challenges. For many companies, this will be an opportunity to streamline their processes and avoid WHT overpayments, which are complicated and time-consuming to recover, provided that the LTA is implemented consciously and with adequate preparation. It will also be crucial to adapt internal procedures to ensure proper verification of the ownership structure of their contractors.