AMENDMENTS TO BILATERAL DOUBLE TAX TREATIES
According to Ministry of Finance announcements, many of the bilateral double tax treaties (“DTTs”) concluded by Poland are being renegotiated. As many as 4 protocols amending the current DTTs have been signed so far in 2012, i.e. with Cyprus, Iceland, Luxembourg and Norway. Those currently in force between Poland - Czech Republic and Poland- Canada will be replaced by new ones.
The ratification process of the treaties and protocols has not yet finished but it is probable that at least some of them will enter into force in January 2013.
At the same time Poland keeps making efforts to commence cooperation with non-treaty countries, including countries currently perceived as tax heavens.
As a result, the new Poland-Saudi Arabia DTT will enter into force on January 1, 2013 and the Poland-Jersey DTT, signed in 2011, awaits its ratification process. Once completed, the total number of DTTs concluded by Poland will be increased to 85.
The most significant changes for taxpayers will bring protocols to the Poland-Cyprus and Poland-Luxembourg DTTs. For those taxpayers who benefit from preferential tax treaty provisions, the amendments will result in the necessity to modify business models currently used.
Amendments to the Poland-Cyprus DTT
One of the most significant changes that the protocol has introduced is the elimination of the so called ”tax sparing clause” (also called the “fictitious credit clause”) that enables taking foreign tax credit for foreign income taxes that could be, but were not, paid on income in that foreign country. In practice, the tax sparing clause means that dividends paid out by Cypriot companies to their Polish shareholders are taxed in Poland at the rate of 9%. This is possible because Cyprus, even though authorized to impose 10% withholding tax on dividend payments, does not. And despite this, thanks to the tax sparing clause, Polish taxpayers are authorized to take 10% foreign tax credit.
As a result of the elimination of the tax sparing clause, dividends received by Polish individual tax residents from Cypriot companies will be subject to Polish standard tax at the rate of 19%.
The protocol also amends the principles of taxing directors’ fees. According to the Poland-Cyprus DTT, directors’ fees received from Cypriot companies by Polish tax residents are subject to tax in Cyprus. Once the protocol enters into force, the directors’ fees will be taxed in the country of the directors’ tax residency. Thus, if a Polish tax resident receives director’s fees from a Cypriot company, it will be subject to tax in Poland (for such revenue, the progressive tax rate of 18% and 32% will be applicable).
The next unfavorable amendment for taxpayers is a change in the method of avoidance of double taxation for business profits and capital gains from tax exemption to tax credit.
Amendments to the Poland-Luxembourg DTT
The protocol introduces the so called ”real estate clause”. For taxpayers it will mean that profits, recognized on the sale of shares deriving their value directly or indirectly from real estate, will be subject to tax in the country where the real estate is situated and no longer in the seller’s place of residence.
Additionally, the tax credit method stipulated currently for interest and royalties will be expanded to, among others, dividends, business profits and capital gains.
At the same time, the protocol decreases the maximum amount of withholding tax on interest and royalties from 10% to 5%.
The protocol also introduces an (uncommon for other DTTs) anti-abuse clause. According to the amended art. 29, the DTT would not be applicable to profits recognized as a result of an “artificial structure”. It seems that in practice the provision will impose on taxpayers the burden of proof to show the business purpose of any optimization scheme. The question is how it would be interpreted by the Polish and Luxembourg tax authorities.
Other amendments
As many as 2 new DTTs (Poland-Czech Republic and Poland-Saudi Arabia) expand the definition of a permanent establishment (“PE”) to the so called ”service PE”. So far, the service PE concept was rare in DTTs concluded by Poland (the service PE concept was introduced, among others, by Poland-China and Poland-United Arab Emirates DTTs).
The Service PE concept in the DTTs will mean that profits on services provided by Polish tax residents in Czech Republic and the United Arab Emirates for at least 6 months in each 12-month period, will be subject to tax also in these countries. The method of avoiding the double taxation of such profits would depend on the method stipulated by each DTT. The profits of a Czech Republic service PE would be exempt from tax in Poland. But the tax paid in Saudi Arabia on service PE profits could be credited against tax due in Poland.
In practice, for taxpayers, the existence of a service PE will result in an increase of tax compliance obligations.
Amendments to the Poland-Switzerland DTT
It is worth noting that as of July 1, 2013 amendments introduced by protocol to the Poland-Switzerland DTT enter into force with respect to withholding tax on interest and royalties. For interest, the standard rate would be decreased from 10% to 5%.
The protocol imposes 5% withholding tax on royalties that have not been subject to tax in the source country so far.
The protocol provides for an exception to these rules, i.e. interest and royalties can be taxed only in the country of residence of their recipient. However, this exception only applies to companies related by capital, provided that the company receiving interest or royalties is their beneficial owner.