Rental of industrial equipment and withholding tax
When entering into a machinery and equipment rental agreement with a foreign business partner, a Polish taxpayer should remember that it may be connected with the need to collect and pay the withholding tax in Poland.
Of key significance in such case is a notion of industrial equipment, which has not been defined in the OECD Model Tax Convention on Income and on Capital. The lack of such definition results from the fact that in most countries income from rental of industrial equipment is treated as business profits and, consequently, in principle is taxed in the country of residence of the business. However, a different solution is applicable to Poland, which is among the countries that have reserved the right to include under the definition of “royalties” also income generated from the rental of industrial, commercial and scientific equipment as well as containers.
In spite of the fact that the agreements on the avoidance of double taxation concluded by Poland extend the catalogue of royalties to include also industrial equipment, such equipment has not been defined in legal regulations, which brings about a lot of doubts for taxpayers in terms of interpretation. Hence, glossary definitions have to be used, which is done both by tax authorities and courts, however, sometimes they reach conclusions to the contrary. What is important for taxpayers, tax authorities and sometimes even courts interpret the notion of industrial equipment very broadly, including under that category not only vehicles and trailers, telescopic forklifts but even crawler excavators (although the Supreme Administrative Court denied such a position in its judgment of 5 March 2014, case ref. no. II FSK 820/12), so also facilities that would not be treated as industrial equipment from the point of the Classification of Property, Plant and Equipment. An attempt to define industrial equipment has been recently made by the Regional Administrative Court in Bydgoszcz (judgment of 19 January 2016, case ref. no. I SA/Bs 985/15), which made use of a glossary definition and found that „in a certain simplification (..) it may be said that “industrial equipment” will be such equipment that is intended to be used or applied in the industry, regardless of the manner of its actual use by the entity taking the equipment on rent.” At the same time, in the court’s assessment „the manner in which the industrial equipment is used by the user (e.g. in the construction industry) does not affect other assessment and qualification thereof, because the use of such equipment for other purposes does not deprive it of its essential features decisive for its classification in the group of industrial equipment”. Similar conclusions were reached by the Supreme Administrative Court in its judgment of 25 March 2015 (case ref. no. II FSK 337/13), where the Court found that “because of its characteristic features, each piece of equipment should be analysed on its own from the point of its possible use in the industry, not the circumstances under which it is used in a given branch of economy.”
Unfortunately, the lack of legal definition of industrial equipment and inconsistent positions of tax authorities and administrative courts in this regard may render difficult correct settlements of the withholding tax. In the case of more “troublesome” equipment, for which no resolutions given by tax authorities and administrative courts in similar cases are available, it may seem reasonable to apply for an individual binding ruling in order to confirm the taxpayer’s position. Where a given piece of equipment is treated as industrial equipment, it means that, pursuant to Article 26.1 of the CIT Act, the entity paying royalties for the use or the right to use industrial equipment, including a vehicle, commercial or scientific equipment, is required as the payer to collect on the payment date the lump sum income tax of 20% on such payments. At the same time, if a certificate of residence of the business partner is available, in accordance with a relevant agreement on the avoidance of double taxation, a rate of tax laid down in such agreement may be applied or the tax may not be collected at all.