Besides dozens of minor and rather technical or procedural amendments
to the 1991 Personal Income Tax Law, the 1992 Corporate Income Tax Law
and the 2000 Law on Tax on Civil Law Transactions, there are three new
regulations particularly worth mentioning.
New 2006 double taxation treaty between Poland and the United Kingdom
The new double taxation treaty between Poland and the United Kingdom
was signed on 20 July 2006. The new treaty with the UK replaced the
previous treaty signed on 16 December 1976. The new treaty, which
applies to both income and capital, reduces the withholding tax on
dividends to: (a) 5 per cent of the dividends, if the beneficial owner
of the dividends is a company which is a resident of the other
contracting state and holds 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 in
which that date falls, or (b) 10 per cent of the dividends in all other
cases. The 1976 treaty provided for a maximum withholding tax rate of 5
per cent of the dividends, if the beneficial owner of the dividends was
a company which was a resident of the other contracting state and held
at least 10 per cent of the capital of the company paying the dividends
on the date the dividends were paid, or 10 per cent of the dividends in
all other cases. The new treaty establishes a 5 per cent withholding
tax levied at the source on cross-border interest payments, except for
interest payable on bank loans, payments for equipment leasing and
payments made to, or guaranteed by, governmental bodies, which interest
will be fully exempt from withholding tax. The 1976 treaty provided for
taxation of interest only in the country of residence of the interest
recipient, and no withholding tax at the source.
The most interesting feature of the new treaty is the different method
of avoidance of double taxation. Under the new treaty, Poland will
apply the exemption with progression as a general rule (thus changing
the method, as the 1976 treaty required the use of the ordinary credit
method as a general rule, applicable in both Poland and the UK) and the
ordinary credit method in cases of dividends, interest, royalties and
capital gains. The UK will continue to apply the ordinary credit method
as a general rule to dividends also accompanied by an indirect credit
for the underlying Polish tax. The previous method of avoidance of
double taxation, combined with higher tax rates and lower thresholds in
Poland than in the UK, in early 2006 forced thousands of Polish
residents temporarily working in the UK to make additional tax payments
in Poland, thus leading to protests and moving the Polish Ministry of
Finance to renegotiate the 1976 treaty. The new double taxation treaty
between Poland and the United Kingdom became effective as of 1 January
2007.
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New tax exemption for domestic payments of dividends between related companies
Under the new changes in the 1992 Corporate Income Tax Law, effective
as of 1 January 2007, payments of dividends between related Polish
companies are exempt from corporate income tax provided that certain
conditions are fulfilled. The new regulation is similar to the one
available in the European Union for cross-border payments of dividends
under the 1990 Parent-Subsidiary Directive. If the dividends are
received by a fully-taxable Polish company which directly holds at
least 15 per cent of the share capital of the company paying the
dividends, for an uninterrupted period of at least two years, then such
dividends are exempt from the withholding tax, which is otherwise
levied on such dividends at a 19 per cent rate. The 15 per cent
threshold will apply during 2007-2008 period, whereas from 2009 it will
be lowered to just 10 per cent.
Elimination of previous tax exemptions regarding certain loans
The new amendments to the 2000 Law on Tax on Civil Law Transactions
eliminated two exemptions that were important from the point of view of
establishing and financing companies in Poland. The first exemption
applied to shareholders’ loans granted to subsidiaries, while the
second one applied to loans granted for the establishment or
development of business activity, under the condition that funds lent
under such loans were used within 12 months following the date of the
loan agreement. Under the new regulations, effective as of 1 January
2007, those two categories of loans will be subject to 0.5 per cent or
2 per cent tax, respectively, thus making the financing of start-up
ventures or subsidiary companies significantly more expensive. ˘
The article firts appeared in "Contact International Business Voice" issue (1/07-77) - Spring 2007
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