There are no restrictions on the use of exemptions or reductions in the flat rate tax levied by the payer at the source, even if it is not permissible under the new art. 22C of the act on CIT.

The new provision, which is a kind of small clause against abuse of tax law, is in force since 2016. It excludes the possibility of tax exemption if there was an agreement between subsidiaries which have no real character and serve mainly to obtain a tax advantage. This is about exemption from tax at the source based on Directive 2011/96/EU. It applies under certain conditions in the payment of dividends and other income on share in profits of legal persons by subsidiaries to parent companies.

Article 22C expressly states that the exemption from flat-rate tax does not apply if: “the achievement of income (revenue) from dividends and other revenue from a share in the profits of legal persons takes place in connection with the conclusion of a contract or performing any other legal action, or several related legal actions, whose main or one of the main objectives was to obtain exemption from income tax pursuant to art.

20 sec. 3 or art. 22 sec. 4, and obtaining this exemption does not result in only eliminating double taxation of this income (revenue)”, and if these steps "have no real character".

Another provision of the amendment provides that the contract or other legal action has no real character to the extent that it is not carried out for legitimate economic reasons. This is particularly true when in performing a given activity the ownership of shares of the company paying the dividend is transferred or the company generates revenue (income), which is then paid in the form of dividends or other income on the share in profits of legal persons.

Here, the question arises whether and what is the impact of this change on the scope of applying international contracts on eliminating double taxation of income. In fact the provisions of the amendment do not apply to those contracts. The obvious conclusion is therefore no limitation in the application of exemptions or reductions in the flat rate CIT collected by the payer "at the source", even in cases when full exemption from such tax is not permissible under art. 22C of the act on CIT.

Thus it will be fully acceptable to reduce the flat tax to 5 or 15 percent. - according to the relevant international contract (e.g. with the Netherlands) or even a full exemption from tax provided by some other conventions (e.g. with Cyprus). In such cases, the legal basis for the exemption will not be mentioned in art. 20 sec. 3 or art. 22 sec. 4 of the act on CIT (to which the amendment refers), but applied directly to the relevant provisions of bilateral tax treaties.