The contentious issue in the case was the assessment of whether the receivables paid by the Company (hereinafter referred to as: the Company or the Applicant) to the Counterparty from Morocco (hereinafter referred to as the Counterparty or the Seller) for the acquisition of a license for a computer program constitute income from copyrights (license fees), and consequently whether the Company is obliged to collect a flat-rate income tax on the payment of these receivables, in accordance with Article 41(4) of the PIT Act. According to the facts presented in the application for an interpretation to the Director of the National Tax Information (hereinafter referred to as: the Director of the National Tax Administration) – the Company operates in the area of production and publishing of computer games. The Company’s activity also includes the acquisition of licenses from contractors (having tax residence abroad) enabling the use, improvement and development of multimedia works that are in the prototype phase (understood as an unfinished work fully protected under Article 1(3) of the Act on Copyright and Related Rights). The purchase of such materials allows for their testing and assessment of economic potential in the field of further development/release and payment of monetary amounts for this.
According to the parties’ agreements, the Company may do practically anything with the purchased games, including: copying and reproducing them in various techniques, saving them on various media devices and in the memory of computers/servers, making them available on the Internet and telecommunications networks, broadcasting them repeatedly, digitizing, as well as using them for advertising, promotional and marketing purposes. In addition, it may make changes to the games (e.g. remakes, shortcuts, adaptations, sequels) and allow others to use such developments – although some of these actions may require the Contractor’s consent.
Question and position of the Applicant
The applicant asked whether he had to collect withholding tax when paying foreign contractors (including from Morocco) for the remuneration for the described licenses.
According to the Applicant, there was no obligation to collect withholding tax, as these receivables were not “royalties” within the meaning of double taxation treaties concluded with these countries. The applicant pointed to the differences between copyright and computer programs resulting from Polish law. The applicant also emphasized that international law also distinguishes between computer programs and literary works.
In the Company’s opinion, since double taxation treaties with these countries do not provide for the concept of “royalties” to include computer programs or games, the Company is not obliged to collect withholding tax on the described payments.
Position of the Director of the National Tax Information System
The Director of the National Tax Administration stated that the provisions of the agreement between the Company and the Counterparty indicate that the purchaser of the software may use it to a wider extent than the end user, which means that the seller has granted him the right to use the economic rights to the program for a fee – so the payment for the software constitutes a license fee.
Since the Applicant, as a purchaser, will be able to duplicate the games, record and reproduce them, it acquires the right to use the economic rights to the software, and payments for these rights are license fees.
Therefore, payments made by the Applicant to a Moroccan counterparty are subject to the provisions of Article 29(1)(1) of the PIT Act in conjunction with Article 12(3) of the Polish-Moroccan Double Taxation Treaty as copyright income. This means that the Applicant is obliged to collect flat-rate income tax in accordance with Article 41(4) of the PIT Act.
The Applicant did not agree with this position, which led to him filing a complaint with the Voivodship Administrative Court.
Position of the Voivodship Administrative Court in Gdańsk
The Court of First Instance agreed with the Applicant, stating that the withholding tax in Poland on royalties applies to revenues from copyrights to literary, artistic or scientific works. Computer programs, although protected by copyright “like literary works”, are treated as a separate type of work and do not fall within the definition of royalties in Article 12(3) of the Polish-Moroccan Convention for the Avoidance of Double Taxation. As a consequence, payments for licenses for computer software are not subject to withholding tax in Poland, and the authority’s previous position ordering its collection was incorrect.
The Director of the National Tax Information disagreed with this position and sent a cassation appeal to the Supreme Administrative Court.
Position of the Supreme Administrative Court
The Supreme Administrative Court dismissed the cassation appeal. When considering the case, the Court took into account that natural persons who do not have a place of residence in Poland are subject to a limited tax obligation – only income generated in Poland is subject to taxation. In accordance with Article 29(1)(1) of the PIT Act, revenues from copyright and related rights are covered by a 20% lump sum, including double taxation treaties. The Supreme Administrative Court pointed out that computer programs are protected by copyright as a separate type of work and the provisions on literary works apply to them, but they are not treated as literary or scientific works. The commentary to the OECD Model Convention allows for the identification of programs with scientific works only where national law allows it, and in Poland it is excluded. The Supreme Administrative Court indicated that receivables for the use of computer software cannot be treated as license receivables for literary, artistic or scientific works. The Polish legislator clearly distinguishes computer programs from other works, despite similar legal protection. Article 12(3) of the Polish-Moroccan Convention for the Avoidance of Double Taxation does not list licenses for computer software, so they cannot be taxed in Poland as license receivables.
As a consequence, payments to a Moroccan counterparty for licenses to a computer program are not subject to withholding tax in Poland, and the Company is not obliged to collect lump-sum income tax in accordance with Article 41(4) of the PIT Act.
Comment by Advicero
The position of administrative courts should be considered correct and consistent with the existing line of case-law. It is worth noting, however, that despite numerous judgments clearly indicating that receivables for access to computer programs, including computer games, do not constitute license receivables subject to withholding tax, the Director of the National Tax Administration again adopted a different position to the detriment of the taxpayer. Such a discrepancy in interpretations shows that similar transactions with foreign counterparties may entail tax risks, in particular with regard to withholding tax obligations. Therefore, it is recommended that each such transaction be carefully analyzed in terms of individual circumstances and, in case of doubt, consult a tax expert or apply for an individual interpretation, which will minimize the risk of improper taxation. In addition, it is worth taking into account the differences in the regulations of double taxation treaties between countries, which may affect the assessment of tax liability in Poland.