Poland Opens Consultation to Extend Pay & Refund Mechanism Implementation

Proposed Extension of ‘Pay and Refund’ Mechanism in Poland

The Polish Ministry of Finance has opened a consultation on extending the temporary exemption for paying and withholding agents from monitoring and withholding flat-rate taxes on income paid to non-resident investors, under the “pay and refund” mechanism (MPR).

The exemption applies to the obligations of withholding agents under MPR to monitor transactions and withhold taxes on passive income exceeding PLN 2 million received by non-residents at the maximum statutory rates, without applying treaty or domestic reliefs.

The MPR was intended to come into full effect on 1 January 2025, however, the proposed extension until 31 December 2025 addresses compliance challenges faced by withholding agents and financial issuers since the MPR system's introduction.

It also provides time for legislative updates, particularly in light of the FASTER directive’s anticipated impact.

The draft regulation was made available in the Public Information Bulletin on 4 November 2024 and is subject to stakeholder commentary before its finalisation.

Understanding Poland’s Path to Withholding Tax Reform

The MPR was introduced in 2018 by the Polish Ministry of Finance to replace the previous relief-at-source system. Under the MPR, withholding agents are required to tax passive income at the maximum statutory rate, regardless of the relief available under tax treaties or domestic law. However, since its implementation, the MPR has faced significant operational challenges and repeated delays.

As of 1 January 2022, the scope of MPR was restricted to specific conditions. It now applies only to passive income—such as dividends and interest—exceeding PLN 2 million per year when paid to ‘related parties’ that are non-tax residents of Poland.

Despite this narrower application, compliance has remained a major issue for withholding agents, who must manage complex monitoring and verification processes.

Two main factors have driven delays in full enforcement:

The administrative burden of creating systems to meet the stringent requirements.

Uncertainty related to the still-pending EU FASTER directive, which could impose further changes.

To address these difficulties, Poland has repeatedly extended exemptions for paying and withholding agents since 2019. This group, typically responsible for managing collective investment accounts, was initially excluded from MPR obligations.

Subsequent extensions, including those for 2022 and 2023, have been designed to give authorities time to address the compliance burdens and adjust the legislative framework accordingly.

The current proposal to extend the exemption until the end of 2025 reflects continued efforts to balance effective tax collection with the practical constraints faced by withholding agents.