A very atypical tax agreement with Taiwan
Poland and Taiwan have just executed what is in effect a double tax treaty, the lack of diplomatic relations between these two entities notwithstanding. It amounts to a precedent-setting instrument, the only one of its kind in the Polish legal system.
Due to the lack of diplomatic relations, the Polish-Taiwanese double tax treaty executed on 21 October 2016 does not have the character of a treaty between two contracting states. The two formal signatories of the instrument were the Warsaw Commercial Office in Taipei and the Taipei Commercial and Cultural Office in Warsaw.
Despite its unusual status, this agreement will be of considerable significance for Polish entrepreneurs who, undeterred by the lack of diplomatic relations, have been working for long years to develop bilateral business relations. To date, the lack of a formal tax treaty amounted to a considerable impediment in these efforts.
A quasi-private agreement
The legal status of the recent agreement between Poland and Taiwan has been the object of negotiations conducted over more than ten years. A breakthrough finally came in the latter half of 2016 with the decision to adopt the pragmatic formula of a quasi-private agreement signed by two commercial offices which will then be incorporated into the Polish legal order by way of a special legislative instrument.
In its substantive aspect, the agreement is based on the OECD Model Convention on income and capital. That said, the OECD template has been subjected to certain modifications so as to take into account the unusual legal context and territorial scope.
The different kinds of taxes to which the agreement applies are euphemistically referred to as “taxes to which there apply tax laws falling within the ambit of the Polish minister of finance” and, respectively, “taxes to which there apply tax laws falling within the ambit of the minister of finance of Taiwan”. The definitions of “territory” and of “competent authority” employ similarly circuitous formulations, as do other parts of the agreement.
Income of establishments, capital gains
The conception of “establishment" adopted in the agreement generally overlaps with that familiar from the OECD Model Convention. Thus, a building site, a construction, or an installation project shall be deemed to constitute an establishment only if it is more than 12 months in duration. Flat-rate taxes collected at source are defined:
For dividends and interest – at a maximum of 10%;
For licence fees – at varied rates, either 3% for receivables paid in consideration for use, or the right to use, of industrial, commercial, or scientific devices or 10% in all other cases (i.e. differently than in the OECD Model Convention).
The agreement’s provisions concerning capital gains include what is known as a real estate clause whereunder profits accruing to a resident of one of the territories from divestment of shares whose value derives, whether directly or indirectly, from real properties located in another territory to a level of over 50% may be taxed in such other territory.
The Polish-Taiwanese agreement also departs from the OECD Model Convention as regards its provisions concerning independent contractors and the liberal professions. One territory may tax income accruing to a resident of the other territory where such resident has at her disposal a permanent establishment within the first territory or sojourns in that first territory for, in aggregate, more than 183 days over any period of 12 consecutive months commencing or ending in the given calendar year. The agreement also provides for proportional credits as a method for avoiding double taxation, and it includes special provisions delimiting contractual benefits. The agreement proper is accompanied by an additional protocol, most of which is devoted to detailed provisions regulating taxation of natural persons resident in Taiwan.
A special solution
In mid-December 2016, the lower chamber of Polish parliament adopted a unique legislative Act regarding the terms of avoiding double taxation and preventing tax evasion with respect to income tax between the Republic of Poland and the territory to which there apply tax laws falling within the ambit of the minister of finance of Taiwan (Journal of Laws item 2244). This Act comes into force as of 1 January 2017, so the Polish-Taiwanese tax agreement shall apply to income earned beginning on 1 January 2017.