On July 17, 2002 Poland officially
announced the additional protocol to the existing double taxation treaty with
Hungary signed in Budapest on September 23, 1992. The new protocol, signed on
June 27, 2000, provides new wording of Article 18 of the treaty (Pensions) and
stipulates that pensions and other similar remuneration paid to a resident of a
contracting state in consideration of past employment shall be taxable only in
that state, however pensions and other similar remuneration paid under the
compulsory pension system of a contracting state to a resident of the other
contracting state in consideration of past employment shall be taxable only in
the first contracting state. Also, Article 19.2 of the 1992 treaty shall be
deleted.
The protocol entered into force on May 1,
2002.
Source:
Official Journal “Dziennik Ustaw” No. 108/2002, item 946 (Protocol) and 947
(Government’s Announcement).
Ratification of the new Double Taxation Treaty with Belgium authorized
On November 14, 2002 Poland officially
announced a law authorizing the ratification of the new Double Taxation Treaty with Belgium, which was signed in
Warsaw on August 20, 2001. The treaty, which in general follows the OECD Model
Convention and applies to both income and capital, provides that the
withholding tax on dividends shall be reduced to: (a) 5% of the gross amount of
the dividends if the beneficial owner of the dividends is a company (other than
a partnership) which (i) holds directly at least 25% of the capital of the
company paying the dividends or (ii) holds directly at least 10% of the capital
of the company paying the dividends and the investment value in the company
amount to at least EUR 500,000 or its equivalent in other currency, or (b) 15%
of the gross amount of the dividends in all other cases. The withholding tax on interest payments
shall be reduced to 5% of their gross amount, except of interest payable: (i)
on a loan insured or guaranteed by a the contracting state, its political
subdivisions or local authority thereof for the purpose of promoting export,
(ii) on any loans granted by the banking enterprises, other than in bearer
form, or (iii) to the other contracting state or to a political subdivision or
local authority thereof, in which cases the interest is exempt from the
withholding tax. The withholding tax on
royalties shall be reduced to 5% of their gross amount. The building site shall be treated as a
permanent establishment if it lasts for more than 12 months.
As a method of elimination of double
taxation, Poland shall apply the ordinary credit method as a general rule and
the exemption with progression in cases of exempt income or capital, whereas
Belgium shall apply the exemption with progression to dividends, interest and
royalties and the ordinary credit to all other items of income. Dividends received from Poland shall be
exempt from taxation in Belgium. The new treaty also provides for mutual
assistance in collection of tax claims.
The new treaty, once enters into force,
shall replace the double taxation treaty between Poland and Belgium signed in
Brussels on September 14, 1976, however, the new treaty did not enter into
force and its provisions are not effective yet.
Source:
Official Journal “Dziennik Ustaw” No. 188/2002, item 1569 (Law authorizing the
ratification of the Treaty).
New Double Taxation Treaty with the Netherlands entered into force
On March 18, 2003 the new treaty with
Netherlands entered into force. Previously, on November 14, 2002 Poland
officially announced a law authorizing the ratification of the new Double Taxation Treaty with the
Netherlands, which was signed in Warsaw on February 13, 2002. The
treaty, which in general follows the OECD Model Convention and applies to
income only, provides that the withholding tax on dividends shall be reduced
to: (a) 5% of the gross amount of the dividends if the beneficial owner of the
dividends is a company (other than a partnership) which holds directly at least
10% of the capital of the company paying the dividends, or (b) 15% of the gross
amount of the dividends in all other cases.
The withholding tax on interest payments shall be reduced to 5% of their
gross amount, except of interest payable: (i) on a loan granted, secured or
guaranteed by a public institution promoting export owned or controlled by the
contracting state, (ii) in connection with the sale on credit of any
industrial, commercial or scientific equipment, (iii) in respect of a bond,
debenture or other similar obligation of the Government of a contracting state,
or of a political subdivision or local authority thereof, or (iv) to the other
contracting state or to a political subdivision or local authority thereof, in
which cases the interest is exempt from the withholding tax.
The withholding tax on royalties shall be
reduced to 5% of their gross amount.
The building site shall be treated as a permanent establishment if it
lasts for more than 12 months.
As a method of elimination of double
taxation, Poland shall apply the ordinary credit method as a general rule and
the exemption with progression in cases of exempt income or capital, whereas
the Netherlands shall apply both the exemption with progression and the
ordinary credit, respectively. The new
treaty also provides for special rules regarding the activities in the
continental shelf (Article 24), as well as mutual assistance in collection of
tax claims (Article 28).
The new treaty shall replace the double
taxation treaty between Poland and the Netherlands signed in Warsaw on
September 20, 1979. The treaty is accompanied by an additional protocol. In particular, the protocol provides that
until both Poland and the Netherlands will fully apply the Parent-Subsidiary
Directive (90/435/EEC), the provisions of Article 10 (Dividends) of the 1979
double taxation treaty shall continue to be applied. Those provision stipulate that the withholding tax on dividends
shall be reduced to: (a) 0% of the gross amount of the dividends if the beneficial
owner of the dividends is a company (other than a partnership) which holds
directly at least 25% of the capital of the company paying the dividends, or
(b) 15% of the gross amount of the dividends in all other cases. The protocol
further stipulates that the interest payable in connection with an agreement
concluded before the signing of the new treaty, during the first 12 months
following the effective date of application of the provision of new treaty
shall be taxable only in the residence country of the recipient.
The new treaty entered into force on
March 18, 2003, and its provisions shall apply as of January 1, 2004, however, the
new treaty has not been officially announced yet.
Source:
Official Journal “Dziennik Ustaw” No. 188/2002, item 1570 (Law authorizing the
ratification of the Treaty) and the official website of the Polish Ministry of
Finance
Announcement of the Double Taxation Treaty with Mongolia
On December 11, 2002 Poland officially
announced the double taxation treaty with Mongolia signed in Warsaw on April
18, 1997. The treaty, which in general follows the OECD Model Convention and
applies to both income and capital, provides that the withholding tax on
dividends shall be reduced to: 10% of the gross amount of the dividends. The withholding tax on interest payments
shall be reduced to 10% of their gross amount, except of interest derived by
the Government of the other contracting state, political subdivision or local
authorities and the central bank or any financial institution wholly owned by
that Government or by any other resident of that other contracting state with
respect to debt-claim indirectly financed by the Government of the other
contracting state, political subdivision or local authorities and the central
bank or any financial institution wholly owned by that Government, in which
cases the interest is exempt from the withholding tax. The withholding tax on royalties shall be
reduced to 5% of their gross amount.
The building site shall be treated as a permanent establishment if it
lasts for more than 12 months.
As a method of elimination of double
taxation, Poland shall apply exemption with progression as a general rule and
the ordinary credit method in case of taxes paid on dividends, interest and
royalties, whereas Mongolia shall apply the ordinary credit method. Poland
shall also grant a tax credit for tax exempted or reduced under certain
incentive measures in Mongolia (“fictitious tax credit”).
The treaty entered into force on July 21,
2001 and its provisions shall apply from January 1, 2002.
Source:
Official Journal “Dziennik Ustaw” No. 206/2002, item 1746 (Treaty) and 1747
(Government’s Announcement).
Announcement of the Double Taxation Treaty with Macedonia
On December 1, 2002 Poland officially
announced the double taxation treaty with Macedonia signed in Skopje on
November 28, 1996. The treaty, which in general follows the OECD Model
Convention and applies to both income and capital, provides that the
withholding tax on dividends shall be reduced to 5% of the gross amount of the
dividends if the beneficial owner of the dividends is a company holding
directly at least 25% of the capital of the company paying the dividends and to
15% of the gross amount of the dividends in all other cases. The withholding tax on interest payments
shall be reduced to 10% of their gross amount, except of interest payable to
the Government of the other contracting state, including its local authorities,
central bank or any other financial institution of such state or interest on
loans guaranteed by the Government of such state, which is exempt from the
withholding tax. The withholding tax on
royalties shall be reduced to 10% of their gross amount. The building site shall be treated as a
permanent establishment if it lasts for more than 12 months.
As a method of elimination of double
taxation, both Poland and Macedonia shall apply the ordinary credit method as a
general rule and the exemption with progression in cases of exempt income or
capital.
The treaty entered into force on December
17, 1999 and its provisions shall apply from January 1, 2000. In bilateral relation, the new treaty
replaces the double taxation treaty between Poland and the former Socialist
Federal Republic of Yugoslavia signed in Warsaw on January 10, 1985.
Source:
Official Journal “Dziennik Ustaw” No. 206/2002, item 1744 (Treaty) and 1745
(Government’s Announcement).
Announcement of the Double Taxation Treaty with Mexico
On January 30, 2003 Poland officially
announced the double taxation treaty with Mexico signed in Mexico City on
November 30, 1998. The treaty, which in general follows the OECD Model
Convention and applies to income only, provides that the withholding tax on
dividends shall be reduced to 5% of the gross amount of the dividends if the
beneficial owner of the dividends is a company holding directly at least 25% of
the capital of the company paying the dividends and to 15% of the gross amount
of the dividends in all other cases.
The withholding tax on interest payments shall be reduced to 5% of their
gross amount, if the interest is beneficially owned by a bank or insurance
company or if the interest is related to bonds or other debt instruments traded
on a regulated market, and to 15% in all other cases. The withholding tax on royalties shall be reduced to 10% of their
gross amount. The building site shall
be treated as a permanent establishment if it lasts for more than 6 months.
As a method of elimination of double
taxation, Poland shall apply exemption with progression and the ordinary credit
method, whereas Mexico shall apply the ordinary credit method. The treaty is accompanied by a Protocol
clarifying applications of Articles 4.1, 8, 10, 12 and 13.2.
The treaty entered into force on
September 6, 2002 and its provisions shall apply from January 1, 2003.
Source:
Official Journal “Dziennik Ustaw” No. 13/2003, item 131 (Treaty) and 132
(Government’s Announcement).
Announcement of the new Double Taxation Treaty with Denmark
On March 12, 2003 Poland officially
announced the new double taxation treaty with Denmark signed in Warsaw on
December 6, 2001. The treaty, which in general follows the OECD Model
Convention and applies to both income and capital, provides that the
withholding tax on dividends shall be reduced to: (a) 0% of the gross amount of
the dividends if the beneficial owner of the dividends is a company (other than
a partnership) holding directly at least 25% of the capital of the company
paying the dividends where such holding is being kept for an uninterrupted
period of no less than one year and the dividends are declared within that
period, (b) 5% of the gross amount of the dividends if the beneficial owner of
the dividends is a pension fund or other similar institution providing pension
schemes, recognized for tax purposes and controlled in accordance with the laws
of the respective contracting state, and (c) 15% of the gross amount of the
dividends in all other cases. The
withholding tax on interest payments shall be reduced to 5% of their gross
amount, except of interest payable: (i) on a loan insured or guaranteed by a
financial institution owned or controlled by a contracting state, (ii) in
connection with the sale on credit of any industrial, commercial or scientific
equipment, (iii) in respect of a bond, debenture or other similar obligation of
the Government of a contracting state, or of a political subdivision or local
authority thereof, or (iv) to the other contracting state or to a political
subdivision or local authority thereof, in which cases the interest is exempt
from the withholding tax. The
withholding tax on royalties shall be reduced to 5% of their gross amount. The building site shall be treated as a
permanent establishment if it lasts for more than 12 months, however certain
special rules apply to an installation or drilling rig or ship used for the
exploration of natural resources in which case a permanent establishment is
created after 90 days of such an activity.
As a method of elimination of double
taxation, both Poland and Denmark shall apply the ordinary credit method as a general
rule and the exemption with progression in cases of exempt income or capital.
The treaty entered into force on December
31, 2002 and its provisions shall apply from January 1, 2003. The new treaty
replaced the double taxation treaty between Poland and Denmark signed in
Copenhagen on April 6, 1976 as amended by the Protocol signed in Warsaw on May
17, 1994.
Source:
Official Journal “Dziennik Ustaw” No. 43/2003, item 368 (Treaty) and 369
(Government’s Announcement).
Contradicting Government’s Proposals for Tax Reform
Contradicting
proposals for tax reform were presented by two members of the Polish cabinet,
Minister of Finance and Minister of Economy and Labor. The proposals presented
by the Minister of Finance call for reduction of the corporate income tax rate
from the current 27% to 19%, elimination of certain off-budget funds,
elimination of automatic elimination of all allowances and exemptions in the
personal income tax, and – which is the most controversial and most criticized
element of the proposals – “freeze” of the current rate structure in the
personal income tax. In addition, from
January 2004 onward, all revenues from both corporate income tax and the
personal income tax are to be allocated to the local budgets only, as opposed
to the present system under which such revenues are shared between the local
budgets and the central budget. The
proposed cut of the corporate income tax rate may result in a revenue loss of
approx. PLN 4 Billion (approx. USD 1 Billion).
The expected loss shall be balanced by the higher VAT revenue, although
there are no plans to increase the current VAT rates.
Originally,
Minister of Finance proposed a reduction of the corporate income tax rate from
the current 27% to 24%, but subsequently, the Minister of Economy advocated a
deeper-reaching cut and suggested additional changes in this respect, which
resulted in contradicting tax reform proposals. Minister of Economy proposed,
among others, to reduce the corporate income tax rate to 19% and to extend this
rate also to individuals performing business activity, who currently pay
personal income tax at the progressive tax rates, ranging from 19% to 40%. In addition, Minister of Economy advocated
only a limited reduction of allowances and exemptions in the personal income
tax and the increase of tax-free amount in the personal income tax, from the
current PLN 2,800 (approx. USD 700) to PLN 4,000 (approx. USD 1,000) per year.
In the same time Minister of Economy proposed a “freeze” of the wages and
pensions at their current level, i.e. without any automatic inflation-related
adjustment envisaged under the existing budgetary regulations.
The
contradicting and un-coordinated partial tax reform proposals publicly
announced by both cabinet members created additional uncertainty with respect
to the much-needed tax reform, which could help to reduce the 18.1%
unemployment rate on the eve of the contemplated accession of Poland to the
European Union in May 2004.
Source:
“Rzeczpospoliat“-daily, April 30, 2003, May 7, 2003 and May 8, 2003, “Gazeta
Wyborcza”-daily, May 7, 2003 and May 8, 2003, “Parkiet”-daily, May 7, 2003,
“Puls Biznesu”-daily, May 7, 2003 and May 8, 2003.
Dr. Janusz Fiszer is Partner at White
& Case in Warsaw and Assistant Professor at the Warsaw University School of
Management in Warsaw.
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