Archive for: Art. 21(1) LEIT

Tax law, case II FSK 1182/08

February 4th, 2010, Tomasz Rychlicki

A Polish company was purchasing rights to use of computer software from companies established in Ireland. The company has paid royalties to non-resident as defined in article 3 of the Polish Act of 15 February 1992 on the Legal Entities’ Income Tax – LEIT – (in Polish: Ustawa o podatku dochodowym od osób prawnych), consolidated text published in Journal of Laws (Dziennik Ustaw) of 2000, No. 54, item 654, with subsequent amendments.

Art. 3. 1. Taxpayers, if their seat or head office is in the territory of the Republic of Poland, shall be liable to pay tax on the entirety of their income regardless of where they have been generated.
2. Taxapyers who do not have a seat or head office in the territory of the Republic of Poland, shall be liable to pay tax only on income generated in the territory of the Republic of Poland.

According to the Polish company, the payment of remuneration to a foreign contracting party for the use of computer software is not royalty and it is not subject to income tax in Poland. Accordingly, the Polish company is not obliged to pay the tax under article 21(1) of the LEIT.

Art. 21. 1. Income tax on revenues derived in the territory of the Republic of Poland by taxpayers, referred to in Article 3.2:
1) from interest, from copyright or related rights, from rights to inventions, trademarks and ornamental designs, including also from selling those rights, from fees for disclosing the secrets of a technique or a production process, for the use or the right to use industrial, commercial or scientific equipment, including vehicles, and for information related to the experience acquired in industry, commerce or science (know-how);

2) from charges for services in the area of performances, entertainment or sports, performed by natural persons domiciled abroad, and organized through natural persons or legal persons conducting commercial activities related to artistic, entertainment or sport events in the territory of the Republic of Poland;

2. The provisions of paragraph 1 shall apply with account being taken of double taxation avoidance agreements, to which the Republic of Poland is a party.

The Polish company is also not obliged to collect lump income tax as defined in article 26(1) of the LEIT.

Legal persons and unincorporated organizational entities and natural persons operating as entrepreneurs, who pay out the amounts due under titles specified in Article 21.1 and in Article 22, shall be obliged, as withholding agents, to collect, subject to paragraph 2, lump income tax on those payments as at the date thereof. However, application of the tax rate arising from a relevant agreement on avoidance of double taxation or waiving tax collection in accordance with such agreement is possible providing the place of residence of the taxpayer has been documented for tax purposes by a certificate (certificate of residence) issued by a competent tax administration authority.

The company asked the Polish Minister of Finance to issue the interpretation on the question whether if it pays to foreign contracting parties the fee for the right to use the software, is it obliged to collect a lump income tax, in accordance with article 12 of the Agreement of 13 November 1995 between the Government of the Polish Republic and the Government of Ireland on avoidance of double taxation and prevent tax evasion on income tax, Journal of Laws (Dziennik Ustaw) of 2000, No. 53 item. 650.

In the order issues of 2 October 2007, the Minister of Finance did not agree with the aforementioned statement of the Polish company. By its decision of 21 October 2007, the Minister refused to annul the order of 2 October 2007. According to the Minister of Finance, international copyright agreements and treaties such as the Berne Convention and the TRIPS include the concept of computer programs being literary works which, in conqequence, allows to extend this rule to all norms/regulations of international law, including the provisions of article. 12, paragraph. 3a of the Agreement.

In the complaint brought before Voivodeship Administrative Court (VAC) in Warsaw, the company, requested the Court to annul the decision of the Minister of Finance because it was taken based on the misinterpretation of article 12 of the Agreement. In support of the complaint the Company claimed that the royalties associated with the purchase of software should be taxed in accordance with article 7, paragraph. 1 of the Agreement – only in the State where the entity obtaining such income as “business profits” is seated.

The VAC in a judgment of 4 April 2008, case file III SA/Wa 2153/07, agreed with the interpretation provided by the Polish company and annuled both the order and the decision. The Minister of Finance brought a cassation complaint to the Polish Supreme Administrative Court (SAC).

The SAC in a judgment of 13 January 2010, case file II FSK 1182/08 held that a computer program is not a literary work. Such interpretation based on article 1 of the Polish Act on Authors Rights and Neighbouring Rights – ARNR – (in Polish: ustawa o prawie autorskim i prawach pokrewnych) of 4 February 1994, published in Journal of Laws (Dziennik Ustaw) No. 24, item 83, consolidated text of 16 May 2006, Journal of Laws (Dziennik Ustaw) No. 90, item 631, with subsequent amendments, is the unacceptable extensive interpretation of the tax law.

Chapter 1
Subject Matter of Copyright
Art. 1.-1. The subject matter of copyright is any expression of creative activity having individual character and manifested in any material form, regardless of the value, intended purpose and manner of expression thereof (work).
2. The subject matter of copyright includes the following in particular:
(1) works expressed in words, mathematical symbols or graphic signs (literary, advertising, scientific and cartographic works and computer programs),

For this reason, the SAC ruled that the payment for the use of computer software is not subject to taxation of royalties that shall be paid at the source of income. This interpretation was made in accordance with the Polish-Irish Agreement.