On 13 February 2013, the Convention on Avoidance
of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income was
signed by Poland and the United States
(“Agreement”). If both countries manage to
complete the ratification process by the end of this
year, the Agreement will become effective at the
beginning of January 2014, superseding the current agreement. The Agreement introduces a number of
amendments significant for business undertakings,
among others with respect to the taxation of interest,
dividends, royalties, branch profits, or remuneration
of company officers. However, due to the extensive
scope of the legislation, only selected aspects of the
new Agreement are discussed below.
The fundamental method of avoiding double taxation
adopted under the Convention is that of exemption
with progression. This means that while income
generated outside Poland is not taxable in Poland, it
is taken into account for the purposes of calculating
the progressive tax rate. On the other hand, the
method of proportional crediting will apply in the
case of income from interest, royalties, dividends,
proceeds from transfer of property, and other types
of income covered by the scope of the Convention.
The Agreement also introduces changes to the
taxation of remuneration and other similar amounts
payable to company officers on account of their
membership in management boards. Under the new
regime, these categories of income can be taxed in
the country of the company’s incorporation. For
instance, a US resident acting as an officer of a
company organised in Poland will be able to be
taxed in Poland.
Another issue that is significant for undertakings is
the taxation of interest and royalties. The good news
is that the Agreement reduces the rate of taxation at
source of royalties from the current 10 percent to 5
percent of the gross amount of royalties.
Unfortunately, in the case of taxation at source of
interest income, the changes went in the opposite
direction as the 5 percent tax rate is to replace the
current exemption. Further, the definition of
royalties was extended by adding to it payments
received as consideration for the use or the right to
use any industrial, commercial, or scientific
equipment. Such an arrangement will without any
doubt hit cross-border leasing transactions which so
far have been exempt from taxation at source.
The taxation of dividends is also regulated
differently under the new Convention. According to
the definition in the Convention, dividend means
income from shares or other interest in profit and
income from other rights in a company which is
treated as income from shares in the state of the
source. It must be noted, however, that the definition
excludes receivables. The rate of taxation at source
of dividend has been set in general at the level of 15
percent of the gross amount of the dividends. Yet, in
the case of dividend paid to a company which holds
at least 10 percent of the voting rights in the
company distributing the dividend, a 5 percent rate
applies.
Article 22 containing provisions limiting contractual
benefits to specific entities (the so-called anti-abuse
provisions), is one of the more significant
regulations of the new Convention. These provisions
seek to prevent reliance on the Convention by
residents of third-party states as well as limiting
abuse of benefits deriving from the Convention
contrary to its purpose.
Summing up, it must be noted that compared to its
predecessor, the agreement of 1974, the new
Convention is much better realigned with the modern
economic realities. Its unquestionable strength is that
it refines a number of issues which so far have raised
concerns. Still, on the other hand, it seems that with
the amendment to the agreement, potential tax
optimisation between Poland and the US will
become greatly restricted.
MILLER, CANFIELD,
W. BABICKI, A. CHEŁCHOWSKI I WSPÓLNICY SP.K.
ul. Batorego 28-32
81-366 Gdynia
Tel. +48 58 782-0050
Fax +48 58 782-0060
gdynia@pl.millercanfield.com
ul. Nowogrodzka 11
00-513 Warszawa
Tel. +48 22 447-4300
Fax +48 22 447-4301
warszawa@pl.millercanfield.com
ul. Św. Mikołaja 7
50-125 Wrocław
Tel. +48 71 337-6700
Fax +48 71 337-6701
wroclaw@pl.millercanfield.com
Disclaimer: This publication has been prepared for clients and professional associates of Miller Canfield. It is intended to provide only a summary of certain recent legal
developments of selected areas of law. For this reason the information contained in this publication should not form the basis of any decision as to a particular course of
action; nor should it be relied on as legal advice or regarded as a substitute for detailed advice in individual cases. The services of a competent professional adviser
should be obtained in each instance so that the applicability of the relevant legislation or other legal development to the particular facts can be verified.