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.