Cyprus: Signed At Last - Protocol to the Cyprus – Poland Income and Capital Tax Treaty

Last Updated: 15 May 2012
Article by Michalis Zambartas

Relations between Poland and Cyprus are nothing new. In 1364 King Casimir the Great (Kazimierz Wielki) of Poland invited King Peter the First of Cyprus to attend a political gathering in Krakow aiming at promoting closer cooperation amongst the European Kingdoms. In the 648 years since then, the economic and political relations between the two countries have grown significantly, particularly over the last two decades following the signature in 1992 of the investment-friendly Agreement for the Avoidance of Double Taxation (the "DTT"). On 22 March 2012, the governments of Cyprus and Poland signed a Protocol amending certain provisions of the DTT in order to further stimulate the development of business relations.

This long-anticipated Protocol introduces certain important changes to the tax regime between Cyprus and Poland that will come into effect once the text is ratified by the Parliaments of both countries. (Until then, all the provisions of the current DTT shall remain in force). The main changes are the following:


The text of the current DTT provides for a 10% withholding tax (WHT) on dividends paid out from a company resident in Cyprus to its Polish shareholder and vice-versa. The new Protocol amends this already beneficial arrangement to make it even more favorable. In the case of a shareholder/beneficial owner being a company (other than a partnership), which holds directly at least 10% of the capital of the company paying the dividends for an uninterrupted period of 24 months, the WHT is 0%. This means that even in cases where the recipient of dividends does not fulfill the requirements under the EU Parent-Subsidiary Directive, it can benefit from the amended provisions of the DTT to reduce/eliminate its tax obligation.

In the case of individuals, as well as companies that do not meet the requirements above, the applicable WHT is 5%.


Since companies registered in Cyprus are often used as intra-group financing vehicles, they are expected to benefit substantially from the amendments brought by the Protocol regarding interest payments. The current DTT provides for a 10% WHT on payments of interest made from a tax resident of Poland to a tax resident of Cyprus and vice versa. The new Protocol reduces this WHT to 5% if the recipient, as the beneficial owner of the interest, is a resident of the other Contracting State.


The Protocol maintains the beneficial 5% WHT as provided in the current DTT, but in line with recent amendments in the OECD Model Convention, it takes account of the requirement the recipient to also be the beneficial owner of the income in order to enjoy the reduced tax rate.

Moreover, the definition of royalties has been amended. Whilst a comparison with the current text of the DTT does not show much difference, there is a clear intention to provide further clarity and to make the scope of this provision as specific as possible.

Beneficial Ownership

Another noteworthy change in the Protocol is the inclusion of the term of beneficial ownership. It can be seen in the new provisions considered above on dividends, interest and royalties. In recent years there has been some confusion over the definition of beneficial ownership. Recent case law in various countries seems to support the perception that the legal owner of the income is also its beneficial owner and this approach seems to justify the use of Holding Companies and thus encourages tax planning.

However the OECD introduced a draft paper discussing the possible introduction of a distinction between "legal ownership" and "economic ownership". Although the OECD paper is still a draft, if this approach is adopted, the tax authorities would be able to pierce the corporate veil in every single case claiming suspicion in tax evasion. As a consequence, of the OECD draft, Poland and Cypriot structures shall need to be revised in order to create substance. What is meant by substance here is essentially the introduction of a solid corporate infrastructure which will ensure that the management and control of the company is located in Cyprus, i.e. the residency status of the company. Furthermore additional substance-enhancing measures will need to be taken such as employing staff, registering with local business associations, etc.

Directors' Fees

The most controversial new provision seems to be related to taxation of directors' fees. One of the major advantages for Polish taxpayers resulting from transactions with Cyprus was the taxability of the directors' fees in Cyprus, i.e. effectively being exempt from taxation. Unfortunately, the relevant provision of the DTT has been often subject to abuse. For instance, the directors' fees provision was often used to distribute sums of money which were presented as a salary of a director of a Company, in reality, they should in most cases have been distributed as a dividend and would thus have been subjected to taxation. In order to combat these cases, the new Protocol amends the relevant provisions stating that any directors' fees and other similar payments derived by a resident of a Contracting State in her/his capacity as a member of the Board of Directors/Supervisory Board or of any other similar organ of a company which is a resident of the other Contracting State shall be subject to taxation only in the state of residence of the Director. As a result, the taxing rights on directors' remuneration are shifted from the source country to the country of residence of the Director, subjecting the Polish residents to a Polish tax burden of 19%.

Exchange of Information

Following the general trend for combating tax evasion and in line with increased transparency regarding cross-border payments, the Protocol introduces a detailed procedure on the exchange of information between the two countries.

The new provisions allow the competent authorities of Cyprus and Poland to exchange any information that is deemed relevant for the administration or enforcement of domestic laws concerning all types of taxes (provided that domestic tax laws are not contrary to the DTT). Any information received by any of the contracting states shall be treated as "secret" (confidential) and may be disclosed only to persons or authorities exercising assessment, collection, appeal or supervision thereof.

Needless to say, the new provisions contain certain safeguards to the application of the general rule of exchange of information. Both contracting states need to follow certain procedures for collecting and supplying information that are in accordance with their domestic laws. In the case of Cyprus Authorities, Cypriot Law 72(I)/2008 on the Collection of Taxes provides that the Director of the Inland Revenue will only supply foreign tax authorities with information if he/she receives substantial details about the concerned person and the reason for the requesting of such information. This provision has been put in place to ensure that the foreign tax authorities do not engage in "fishing expeditions" without a valid excuse or claim for detailed information about the activities of the person under investigation. As a further precaution, Cypriot legislation provides that the Director of the Inland Revenue shall only supply information if he/she has obtained the prior written consent of the Attorney General.

To ensure the effective application of this provision, the Protocol stipulates that the relevant authority cannot refuse to supply information merely on the grounds that it has no domestic interest in the said information. In addition, information that could qualify as trade, business or industrial secrets will not be caught with the ambit of the Protocol and will not be subject to exchange.

Avoiding of Double Taxation

The Current DTT provisions on Double Taxation allow for a decrease of the Polish Tax paid on dividends, interest and royalties in accordance with the tax payable in Cyprus. The new Protocol abolishes the latter and provides that the decrease of the Polish Tax shall be applicable on the tax which was paid in Cyprus.

It is expected that when the above change shall come into force, dividend income of a Cypriot Company received by Polish Tax Residents shall be subjected to a rate of 19%.


The new Protocol should be seen as an instrument aimed at enhancing the business relations between Poland and Cyprus. It is expected to enter into force on 1 January 2013. As noted above, the most important changes are the introduction of the Beneficial Ownership principle and the substance considerations. Furthermore the abolition of the directors' fees "loophole" will make structures between Poland and Cyprus more transparent and free from exploitative tax planning. A major benefit of the Protocol is that it actually goes further than the Parent Subsidiary Directive, expanding on the circumstances where 0% WHT shall be applicable to dividends. It is now of essence to consult your tax advisor the soonest in order to assess whether your current structures are compliant with the new Protocol.

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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