Beneficial owner – draft clarifications from Ministry of Finance

5 min.

Successive amendments to income tax legislation have placed increasing emphasis on the need to verify that the counterparty is the ultimate beneficial owner. However, the legal complexities make complying with this obligation extremely difficult for many businesses. The amendments include a number of key indicators to determine whether an entity is acting as an intermediary. For example, entities acting as an intermediary are often characterised as receiving a small margin on the payments transferred, have significant balance sheet items related to foreign partners or receive receivable payments at regular intervals. The Ministry of Finance also draws attention to situations in which the right to dispose of income may be limited by obligations to transfer payments to other entities, both on a factual and legal level.

The Beneficial Owner: Criteria and Challenges

In response to doubts that have arisen about who is a beneficial owner, the Ministry of Finance has published draft clarifications that were the subject of a recent public consultation. The final content of these clarifications will soon be available, and the hope it that this will finally dispel doubts regarding the interpretation of these provisions.

Under the proposed amendments, a beneficial owner is an entity that meets the following criteria:

  • it receives the amount due for its own benefit, can freely decide what to do with it and bears the economic risk associated with any loss of the amount due or part thereof;
  • it is not an intermediary, representative, trustee or other entity obliged to transfer the amount due, or any part thereof, to another entity; and
  • it conducts genuine economic activity in the country of its registered office; if the payments are received with reference to this economic activity, in assessing whether the entity conducts a genuine economic activity, the nature and scale of the entity’s activities with respect to the payment received should be taken into account.

The ministry has recently issued extensive announcements that are relevant to all businesses.

Firstly, the ministry clarified that entities that receive receivables for their own benefit and are not required to transfer these funds to other entities are considered the beneficial owners. This is an important clarification, as it determines who actually controls the funds received.

Furthermore, the ministry stressed that entities acting purely as an income administrator with respect to the payments received cannot be considered as beneficial owners. This means that these entities do not independently decide on the destination of the received funds, which is a key difference in terms of being considered owners.

It is worth noting that these two premises – receiving payments for their own benefit and not being required to transfer them to other entities – should be considered together. This is a key aspect to consider when analysing your company’s situation in the context of this guidance from the Ministry of Finance.

The Role of the Revenue Administrator: Key Indicators

The text from the ministry highlights key indicators in identifying those acting as intermediaries in the transfer of payments. This information is crucial for business, and understanding it can have a significant impact on decision-making. Businesses should pay attention to the following key aspects:

Low Margin Payments: Low-margin entities are suspect because they often receive payments only to pass them on without generating a profit from the transaction.

Lack of Actual Taxation: If an intermediary entity does not tax the payments it receives, this may be a signal that it is acting as an intermediary and not as the owner.

Cyclical and Regular Remittance of Payments: Transferring payments at short intervals, on a cyclical and regular basis, may indicate the role of an intermediary.

Lack of Reinvestment of Funds Received: If an entity does not reinvest the funds received, it may suggest that it is not the beneficial owner.

Predominant Cross-border Payments: If the majority of income comes from cross-border payments, this may indicate an intermediary role in international transactions.

Complicated Ownership Structure: When the shareholder structure is complicated, with the involvement of further intermediary companies, this may suggest the concealment of the true owner.

Lack of Preferential Taxation for the Ultimate Recipient: When payments are made to an entity that does not benefit from preferential taxation under other tax laws, this may be a signal of acting as an intermediary.

Temporal Link and Change in Tax Provisions: The existence of a temporal link between the creation of an entity and a change in tax rules may suggest an attempt to avoid taxes.

Tax Jurisdiction: Choosing a jurisdiction with an extensive network of double tax treaties or preferential taxation rules for passive income can signal that the entity is acting as an intermediary to minimise taxation.

Low Withholding Tax for Non-Residents: The absence or low level of withholding tax in an entity’s jurisdiction may indicate an intermediary role in international transactions.

Understanding these indicators is crucial for businesses to identify potential risks associated with business partners. Avoiding entities with an intermediary role can help minimise potential tax and legal issues, which is important for the stability and success of business operations.

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Attorney trainee in Poland
Agata Wleklińska
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ECOVIS Legal Poland
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This article is part of the Newsletter No. 5 | 2023.