Cyprus: Polish Tax Planning Opportunities Via Cyprus

Last Updated: 7 March 2012
Article by Charles Savva

If structured properly, a Cyprus partnership distribution to a Polish tax resident individual can be exempt from Polish tax.  The LP structure is commonly used for holding/disposal of Polish FIZ (a form of Polish Closed End Fund) certificates, as well as shares in a Polish limited liability entity.

As the general/unlimited partner of the LP should be a Cyprus tax resident company ("CypCo"), with its management and control exercised in Cyprus, having the exclusive authorization to bind the LP and/or sign/endorse/execute documents on its behalf, the income of the LP should in our view be deemed as being attributable to a permanent establishment of the Limited Partners in Cyprus under paragraph (e), the dependent agent clause, of the permanent establishment definition included in Article 2 of the Cypriot Income Tax Law.

It should be noted the Limited Partner(s) will have an obligation to register with the Cyprus Income Tax Office, and submit annual personal Income Tax Returns (Form IR1) accompanied by the audited financial statements of the LP.

The Limited Partner(s), being a non-Cyprus tax resident, will only be required to declare their Cyprus source income (i.e. the income attributed to the Cyprus permanent establishment). Any other foreign sources of income (for example, salaries/remuneration from Polish companies for employment services rendered in Poland etc) are not taxable in Cyprus and should not be declared on Form IR1.

Since the Limited Partner(s) will have a permanent establishment in Cyprus, any income attributed to that permanent establishment should be taxable (if not exempt) in Cyprus as follows:

  1. Profits on disposal of shares should be exempt from personal income tax since they are considered to be "securities" for Cyprus tax purposes.
  2. Dividends receivable from foreign entities are exempt from personal income tax. They should also be exempt from special contribution for defence provided the Limited Partner(s) are not tax resident of Cyprus (i.e. not present in Cyprus for periods exceeding 183 days during a tax year).
  3. Any other trading profits of the LP, including interest closely connected to the ordinary carrying on of a business, such as interest from bank current accounts, should be subject to personal income tax in Cyprus in the hands of the Limited Partner(s), based on their share of partnership profits, at the following rates:


Taxable income (in Euro)

Rate %

Accumulated tax €

0 – 19,500

0

Nil

19,501 – 28,000

20

1,700

28,001 – 36,300

25

3,775

36,301 – 60,000

30

10,885

Above 60.000

35



In the case of CypCo, being the general partner, as it will be tax resident of Cyprus it should be subject to taxation in Cyprus on its worldwide income (including the share of profits of the LP to which it will be entitled). However, any profits from disposal of shares and dividends receivable from foreign entities should be exempt from corporation tax and special contribution for defence. Any interest income of the LP to which CypCo will be entitled, should be subject to either 10% corporation tax or 15% special contribution for defence depending on its nature.

In our opinion, any potential challenges should be anticipated from the Polish Tax Authorities and not the Cypriot authorities.

There are strong arguments supporting the commercial use of an LP structure.  Having said this, in order to enhance the LP structure, in its various forms, we recommend the following:

  1. Addition of at least one limited partner.  Having only one limited partner should be considered as aggressive and most of the legal arguments in favour of using an LP would not be valid.
  2. Delay liquidations of LP.
  3. Reinvest funds in order to demonstrate that the structure was not set up exclusively for a one-off transaction.
  4. Although a PE is created as per Cyprus tax law, as established above, there is probable risk that the Polish tax authorities may challenge existence of such PE.  In the event of such challenge, the concern would be that if you consider the actual activities of the LP, it may be the case that it would be difficult to argue the existence of a place of management, or that a dependant agent exists (especially if the agent, being the general partner, has not executed any agreements on behalf of the LP). It is important that the Cypriot general partner does execute some agreements in the name of the LP, otherwise we would expect that the probability of being potentially and successfully challenged in Poland that there is no PE in Cyprus may be higher.

In our opinion, the most effective initiative, and safest option available, is addition of economic substance at the level of the LP, through set up of a fully fledged office with one or more employees, office rental agreement, dedicated phone line etc.  This would also serve the purpose of ensuring creation of PE under the fixed place of business and office clauses (see Article 5(2)(c) of the Poland-Cyprus Agreement for the Avoidance of Double Taxation).

Savva & Associates has assisted our good Polish clients with obtaining positive tax rulings in Poland regarding the said structure.  In addition, we have significant expertise in drafting suitable and tax efficient LP agreements between the partners concerned, putting into place an appropriate level of structure, and overall administering the structure on an ongoing basis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Charles Savva
 
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