In recent years Poland has introduced a large number of changes to its bilateral tax treaties, inter alia, either concluding new treaties that replace the existing ones, or modifying the existing treaties by newly signed protocols.
The most common modifications apply to the methods for avoidance of double taxation, mainly for the purpose of eliminating the possibilities of effective double non-taxation in the cases where the other contracting state does not tax a particular item of income, and Poland must in turn apply the exemption method to such income. As a result of the above, the current treaty policy includes the general replacement of the exemption method with the ordinary credit method, thus eliminating one of the most popular taxoptimization schemes, based upon the combination of effective non-taxation in a foreign jurisdiction with mandatory tax exemption in Poland.
One recent change of this kind applies to the tax treaty between Poland the Slovak Republic dated August 18, 1994, which has been modified by a new Protocol dated August 1, 2013, which amendment became effective on January 1, 2015 and applies to income received on or after that date.
The new Protocol with the Slovak Republic has introduced a number of changes to the 1994 treaty, of which the most important one consists of the significant widening of the scope of the application of the ordinary credit method. In addition to the typical application of such method to passive income, i.e. dividends, interest and royalties, it shall be applied to the business profits (including profits of the permanent establishments located in another state), capital gains, independent personal services and directors’ fees (new wording of Article 24.1.a and 24.1.b). As a consequence, the previously applied scheme, based upon a combination of a Slovak limited partnership receiving tax-exempt dividends from a third country, which have been treated in Slovakia as income from a Polish permanent establishment, thus exempt from income taxation in Poland—does not work after January 1, 2015. The changes introduced by the new 2013 Protocol provide that the business profits of a Polish enterprise made by a permanent establishment located in Slovakia will be taxed based upon a credit method. Thus the profit of a Polish enterprise, which enjoyed tax exemption in Slovakia, will be subject to full taxation in Poland.
Another change introduced by the new Protocol is the adding of an additional ‘‘switch-over’’ clause, which allows Poland to unilaterally change the method for avoidance of double taxation if Slovakia applies the treaty or domestic tax law to exempt certain income or capital from taxation or applies the reduced withholding tax rates to dividends, interest or royalties (new Article 24.1.c).
Further changes apply to the taxation of capital gains related to the transfer of assets and provide for an additional ‘‘real estate-rich company clause’’, which provides that the gains derived by a resident of a contracting state from the alienation of shares of a company deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other contracting state may be taxed in that other state (new Article 13.4)
Further changes introduced by the new Protocol include a significant widening of the scope of exchange of information on tax matters and a new limitation on benefits clause, stating that nothing in the treaty shall prevent the tax administration from identifying the substance of a transaction and that the benefits of the treaty shall not apply if income is paid or derived in connection with an artificial arrangement (new Article 28A).
The new regulations have introduced lower withholding tax rates, reducing the maximum tax on dividends from 5% or, respectively 10%, to 0%, if the beneficial owner is a company (other than a partnership) which holds directly at least 10 per cent of the capital of the company paying the dividends on the date the dividends are paid and has done so or will have done so for an uninterrupted 24-month period, or 5% in all other cases. In the case of interest the withholding tax has been reduced from 10% to 5%, whereas in the case of royalties, the Protocol only slightly amended the definition of such payments, while leaving the maximum withholding tax rate unchanged at the level of 5% (amended Articles 10, 11 and 12).
The new Protocol also introduced the so-called secondary adjustment in the case of associated enterprises if the tax authorities in one contracting state adjusted the taxable income of an enterprise, thus triggering a corresponding adjustment in the other contracting state (new wording of Article 9).