In the course of their business, entrepreneurs often decide to rent a car for business purposes, including foreign trips. They then consider whether and to what extent the received rental invoice can be included in tax-deductible costs or constitute the basis for VAT deduction. However, they very often forget that in a situation where a car is rented outside Poland, there may also be taxation of rental payments with withholding tax (WHT). Failure to analyse and exercise due diligence in this regard, on the other hand, may have negative consequences for the domestic entrepreneur – in terms of liability for tax arrears and penal fiscal liability for breach of the tax remitter’s obligations.
Checking whether payments for the use of a car rented abroad are subject to withholding tax in a given case will be very important, since if so, you should ask yourself what WHT rate to apply and on what terms.
Car rental and national (Polish) regulations
In accordance with the provisions of the Income Tax Acts, a Polish entity making payments to foreign entities may be obliged to withhold and pay the so-called withholding tax (WHT) in Poland. However, this applies only to strictly defined types of payments, including, m.in, fees “for the use or right to use industrial equipment, including a means of transport”1.
In this case, the WHT rate is 20%. This means that a Polish entrepreneur making a payment to a foreign entity for renting a car should pay 20% of the tax on such a receivable to the tax office.
Will it always be like this? Well, it do not have to. The Polish provisions on withholding tax are applied taking into account double tax treaties to which Poland is a party.
Double Tax Treaties (DTT) – Royalties vs. Business Profits
Depending on which country the car rental company is based (or more precisely, has its tax residence), the rules for taxing car rental payments may vary.
Some double tax treaties include “fees for the use or right to use an industrial device” in the definition of license fees (royalties). And if the agreement does not contain its own narrow legal definition of the term “industrial equipment”, then (in accordance with Article 3(2) of individual double tax treaty) such a concept should be interpreted in accordance with national (Polish) tax regulations – which, as mentioned above, directly include means of transport in the concept of “industrial equipment”. This position is also shared by the Polish tax authorities and administrative courts.
Car rental fees qualified as royalties will be subject to WHT, however, under certain conditions, they may benefit from taxation at a reduced WHT rate (usually between 5% and 15%).
In other cases, i.e. when a given double tax treaty does not include fees related to the use of industrial equipment in the concept of royalties, such fees will be taxable only in the country of residence of the entity receiving the payments (without the need for the tax remitter to collect WHT).
Therefore, it will be crucial to determine each time which double tax treaty may apply and to carefully analyze its provisions.
Conditions for the use of the preference provided for in the international agreement (DTT)
It should also be remembered that the mere reference to the provision of the relevant double tax treaty is not sufficient to apply the reduced rate or exclusion from WHT. Polish entity acting as the remitter is obliged to exercise due diligence and properly document it in order to be able to demonstrate to the tax authorities that it has correctly verified the entitlement to apply a given preference.
In this respect, the absolute minimum is to obtain a certificate of tax residence from the car rental entity valid for the period of payment for the car rental fee. In practice, however, there may be a problem with obtaining it. In addition, the authorities often require more extensive documentation, confirming the actual conduct of business by the car rental entity or his status as the beneficial owner of the payments received. Any deficiencies or inaccuracies in this regard may result in the refusal to apply the provisions of the relevant DTT. And this means that the domestic entrepreneur is obliged to pay 20% of WHT on the basis of national regulations – however, if it is not possible to deduct WHT from the payment made, it may be necessary to gross it, which is associated with an additional expense on the part of the Polish tax remitter and the need to assess the possibility of including it in tax-deductible costs.
Settlement of rent with an employee – an exception
A distinction should be made from the presented above situation in which the employee rents a car abroad in his own name and his/her surname appears on the invoice as the buyer of the rental service, and the employer only reimburses him for the rental costs incurred in this regard. In such a situation, the tax authorities consider that the employer is not obliged to collect WHT, because the employer is not the buyer of the rental service and does not make payments directly to the foreign rental entity.
Summary
Failure to analyse the effects of using cars rented abroad on the basis of withholding tax and deficiencies in the documentation confirming such an analysis may result in irregularities in the settlements of Polish taxpayers. As a rule, these are not large amounts at a time, but the repetition of such transactions in the long run will increase the amount of risk and result in the need to rectify settlements for longer periods.
Therefore, if there are cases of use of cars rented from foreign entities in your business, or if you are planning such transactions and you are interested in creating or refining procedures in this area – please contact us.
As part of our services, we offer:
- verification or development of procedures setting the rules for renting cars abroad (to whom invoices should be issued, who and how to make payments, what documentation should be collected and whether and how to pay WHT)
- determining the tax consequences of specific cases on the basis of national legislation and the relevant double tax treaty
- review of the documentation and indication of risks resulting from potential deficiencies along with recommendations how to demonstrate due diligence in the commented cases
Authors: Katarzyna Jaromińska / Agnieszka Czarnecka
1 Article 21(1)(1) of the Corporate Income Tax Act and, respectively, Article 29(1)(1) of the Personal Income Tax Act.
