MPLS is a routing technique in telecommunications networks that directs data from one node to the next based on labels rather than network addresses (source: Wikipedia).
It is more and more often an element of settlements with software providers to Polish taxpayers. If the service provider is a foreign entity, then the issue of withholding tax should be considered.
The first possible situation is charging for MPLS as part of a comprehensive service, which also includes elements such as renting or sharing any devices, in particular servers or disks. If such a service involves (as a package) the rental of equipment (e.g. a server), we will be dealing with WHT taxation in Poland (e.g. individual interpretation of the Director of the National Tax Information of 12 December 2022, file reference number 0111-KDIB2-1.4010.579.2022.2.BJ). This follows from the fact that the key element is payment for the rental of equipment – the tax authorities are of the opinion that these are royalties, taxable both under the CIT Act and double tax treaties.
However, if this element is missing, then I believe that the MPLS-related service is an IT service that should not be taxed with WHT – both under the Polish CIT Act and double tax treaties. Such services are not indicated in Article 21 sec. 2a of the Polish CIT Act, nor are they similar to them – in particular, they are not data processing services.
Payments for these services are also not included in the scope of royalties, which is confirmed by individual interpretations:
“With regard to MPLS – re-invoicing of telecommunications costs, it should be pointed out that the receivables paid by the Company to company B. with its registered office in Israel are not royalties within the meaning of Article 12 of the agreement with Israel and therefore they will not be subject to the 20% flat-rate income tax (the so-called withholding tax). The payments made by the Company are in fact in the nature of payment for services, they are not remuneration for the use or the right to use an industrial, commercial or scientific facility within the meaning of Article 12 of the agreement with Israel.“
(individual interpretation of the Director of the National Tax Information of 25 October 2022, file reference number 0111-KDIB1-1.4010.201.2022.2.MF)
See also: individual interpretation of the Director of the Tax Chamber in Warsaw of 3 July 2012 (file reference number IPPB5/423-304/12-2/AJ), individual interpretation of the Director of the National Tax Information of 20 October 2020 (file reference number 0111-KDIB1-2.4010.272.2020.2.ANK).
Interestingly, Article 15e of the Polish CIT Act, which is no longer in force, concerned a very similar catalogue of benefits as Article 21 of the Polish CIT Act, although its subject was the limitation of tax costs in the scope of the so-called intangible services.
On the basis of this provision, individual interpretations were issued, in which services with a component of MPLS activities were considered limited under this provision, e.g. as management services:
“On the basis of the above assumptions, it should be stated that the above services are services referred to in Article 15e(1)(1) of the Act. Services related to the operation of an IT network, network services related to the MPLS technique, virtual private network (VPN) services and end-user support services in the part related to services related to the management of information systems, as well as the services expressly referred to in the wording of the above-mentioned provision, constitute intangible services consisting in management. As a result, the above services are subject to tax-deductible costs under Article 15e(1)(1) of the Corporate Income Tax Act.“
(individual interpretation of the Director of the National Tax Information of 29 January 2019, file reference number 0111-KDIB2-3.4010.330.2018.2.KK)
See also: amendment to the individual interpretation of the Director of the National Tax Information of 30 January 2023 (file reference number DOP4.8221.134.2021.CPXJ), individual interpretation of the Director of the National Tax Information of 23 January 2019 (file reference number 0114-KDIP2-2.4010.550.2018.2.SJ), individual interpretation of the Director of the National Tax Information of 27 November 2018 (file reference number 0111-KDIB2-1.4010.326.2018.2.BJ).
In my opinion, the above should not influence the assessment on the basis for WHT purposes. Firstly, interpretations under Article 15e of the Polish CIT Act were pro-fiscal and were often overturned by administrative courts (e.g. judgment of the Supreme Administrative Court of 29 June 2022, file reference number II FSK 2986/19). Secondly, the purpose of this regulation was different – it limited the benefits between related entities. While in the case of related entities it is possible to consider whether MPLS was a component of group management of the IT area, in practice WHT we often deal with unrelated entities. It is difficult to conclude that a telecommunications company (supplier) “manages” the affairs of the Polish taxpayer. Finally, the approach under this provision was much more based on the assessment of the grouping of statistical classification of the services in question than on the (economic) analysis of the content of the services.