Payment of remuneration to foreign entities may result in the obligation to collect the withhold tax (WHT). This applies to the payment of dividends, interest, royalties or remuneration for specific services.
Theoretically, the tax is borne by the recipient. Therefore, it should receive its value after the WHT deduction. Nevertheless, some foreign contractors demand to receive the entire amount. In such situation, it is the Polish remitter who has to bear the tax burden. This “procedure” is called grossing-up.
The entire payment, i.e. the nominal part and the gross-up value, are treated as the remuneration of the foreign entity.
Is grossing up mandatory?
No, it’s a voluntary arrangement of the parties. Nevertheless, some foreign contractors put great emphasis on this type of provision.
Does gross-up give the payer more rights?
If there is an overpayment, it is the taxpayer that can claim it’s return. Under normal circumstances, this is a taxpayer’s right.
It is worth mentioning that the new withholding tax collection regime is to apply from the beginning of 2021. In the event of payments of over PLN 2 million to one recipient, it will be necessary to collect eh WHT on the surplus and then to apply for its return. The Polish remitter may apply in case of grossing up.
This obligation does not apply if a clearance opinion has been obtained. It can be obtained for the tax exemptions on dividends, interest and royalties paid to eligible entities in the EU.
As a rule, only taxpayers can apply for it. However, this right also applies to settlements with a foreign entity, when the remitter bears the tax burden. This is the case of grossing up.
Does the gross-up have to be contractual arrangement?
Yes, gross-up should result from a contractual arrangement of the parties. Preferably, the relevant clause should be included in a written contract. In practice, however, it happens that such a decision is not written down. As the experience of contacts with tax authorities shows, for the purposes of issuing a clearance opinion, they accept situations in which the applicant himself or the contractor declares that gross-up situations may occur. This is a favourable approach as it does not require contractual changes.