Withholding tax on sharing software in the cloud? | In Principle

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Withholding tax on sharing software in the cloud?

Modern tech solutions such as the software-as-a-service model, where users don’t have to maintain IT infrastructure on their own hardware, are becoming increasingly popular among taxpayers. But the fee for cloud solutions paid abroad may be subject to withholding tax if it is treated as a fee for use of an industrial device.

In earlier individual interpretations, the approach of the director of Poland’s National Revenue Administration indicated that the acquisition of cloud services does not result in a transfer of copyright and therefore is not subject to withholding tax. These interpretations concerned states of fact (or future events) in which the applicants indicated that the acquisition of an SaaS service consists in gaining access to the functionality of software installed in the hardware and system environment of the service provider or its subcontractor, with the software being used exclusively for its own use. Or the taxpayer was purchasing services to access the cloud and data collected in it, applications and other IT resources located on multiple servers, in multiple locations, accessible virtually, via a web browser (see individual interpretations of 20 May 2022, no. 0111-KDIB1-2.4010.74.2022.2.MZA, and 21 April 2022, no. 0111-KDIB2-1.4010.91.2022.1.BJ).

However, in an individual interpretation dated 17 August 2022 (no. 0111-KDIB1-2.4010.344.2022.1.MZA), the director of the National Revenue Administration assessed an SaaS service in the context of the fee subject to withholding tax for use of an industrial device. The authority analysed SaaS services, described as a software solution, in the context of which a taxpayer can use applications provided via internet for specific business needs, e.g. using the computing power of servers and the functionality of applications, without the need to install them on its own computer equipment.

The SaaS services in question were a subscription-based solution, hosted, supported and operated on demand. During the subscription period, the taxpayer could access its data at any time and export and retrieve it in a standard format. Upon termination of the service, the taxpayer’s data was deleted from the application provider’s servers.

In the description of the facts, the taxpayer indicated that in the acquired SaaS services, it was receiving only a limited, non-exclusive right to use the software on a certain number of workstations, exclusively for the needs of its business as an end user, without the possibility of further licensing, sublicensing, sale or other form of distribution of the software, and without the possibility of introducing changes or modifications to the software covered by the SaaS service.

The tax authority found that services including infrastructure services, such as cloud and data centre services, as well as SaaS services consisting in enabling access to software hosted on servers or in the cloud, should be treated as IT infrastructure in both physical and virtual dimensions, constituting a mechanism or set of elements used to perform specific activities. Thus, it should be treated as an industrial device. As a result, the fee on this account constitutes remuneration for the use or right to use an industrial device, falling within the scope of Art. 21(1)(1) of the Corporate Income Tax Act, subject to the flat-rate withholding tax. Based on that provision, the rate is 20%, but it may be subject to reduction, or an exemption may apply under the relevant tax treaty or provisions implementing the Interest and Royalties Directive (2003/49/EC). The withholding tax is calculated, withheld and paid to the tax office by the Polish payer, acting as a remitter.

It seems that the tax authorities interpret the concept of “industrial device” broadly. Therefore, the payment to a foreign entity of a fee for services provided under the SaaS model should be preceded by an analysis of withholding tax obligations. If it is confirmed that the infrastructure services such as SaaS constitute access to an industrial device, the fee for the service may be subject to withholding tax.

The scope and nature of the activities performed using technical infrastructure should be decisive for this issue, but technology development may pose interpretive difficulties. It seems that if the infrastructure does not perform industrial functions, e.g. it is only used to store and collect data, applications and other IT resources, it should not constitute an industrial device—this has to do with the essential purpose of such device (see Supreme Administrative Court judgment of 2 December 2021, case no. II FSK 1061/21). However, infrastructure that generally performs such functions may be treated differently for purposes of withholding tax.

Jakub Stankowski, Tax practice, Wardyński & Partners