Effects of the tax treaty with Bosnia-Herzegovina

The new double taxation and tax evasion avoidance treaty between Bosnia-Herzegovina and Poland introduces many changes concerning taxation of the earnings and assets of residents of these two countries.

The present treaty, signed on 4 June 2014, replaces the double tax treaty signed on 10 January 1985 between Poland and the former Socialist Federal Republic of Yugoslavia.

Under the new treaty, a construction site and various construction, installation, and/or fitting works shall constitute an establishment for tax purposes if they continue over a period exceeding twelve months (this limit was previously set at 24 months).

Much as has hereto been the case, dividend payments passing between the two jurisdictions fall under the classic 5/15 formula, meaning that the maximum tax collected at source on dividends disbursed to a corporate entity directly holding at least 25% in the dividend payee shall be 5%, and 15% for other cases. The maximum tax collected at source on interest and licence fee receivables (defined, as in the treaty from 1985, as payments for use of, or the right to use, industrial, commercial, or scientific assets) shall be 10%.

The new treaty’s provisions concerning capital gains include a new real estate proviso whereunder profits accruing from transfer of company shares whose value is accounted for, directly or indirectly, by real estate in a proportion of 50% or more may be taxed in the country in which such real estate is located. As regards the methods for avoiding double taxation, Poland is to apply exemption with progression as the basic method – but not to revenue from establishments, dividends, interest, licence receivables, and capital gains, where ordinary (proportional) crediting shall apply. Bosnia-Herzegovina, for its part, shall apply the ordinary crediting method on a uniform basis (a new solution in comparison with the old treaty from 1985).