The new method for settlement for income from Iceland is favourable

17.03.2014 Publications

For almost three months now, the new protocol to the double tax treaty between Poland and Iceland from 19 June 1998 has been applicable in practice. The protocol (signed in Rejkyavik on 16 May 2012, in force since 23 August 2013) amends the original double taxation treaty in only two points, but fairly important ones. So, do these amendments translate into benefits for taxpayers ?
The first amendment concerns the method of avoiding double taxation applied by Poland in bilateral dealings with Iceland. The general tendency is towards substitution of proportional (ordinary) crediting in Polish tax treaties with progressive exclusion (exemption) as the basic method. As a result, while art 23 of the 1998 double taxation treaty between Iceland and Poland provided for uniform application of the proportional crediting method by both the contracting states, the 2012 protocol differentiates between the double taxation avoidance methods applied in each of the two jurisdictions. Iceland is adhering to the proportional crediting method, but Poland is moving to exclusion with progression as the basic method, with proportional crediting used for income accruing from dividends, interest, licence fees, and capital gains (i.e. for the income categories specified in arts 10, 11, 12 and 13 of the treaty).

This change is positive in that it amounts to a significant administrative convenience for Polish tax residents sojourning (and earning income) in Iceland on a temporary basis. In a situation where, for the given tax year, such an individual did not have any taxable income other than remuneration for work in Iceland, she/he no longer has to file a tax return in Poland to disclose such Icelandic income. The duty to file such a tax return would still apply in the case of income from dividends, interest, licence fees, and capital gains, but – given the statistical characteristics of Polish income earners in Iceland – these are likely to be isolated cases. According to current estimates, there are now some 9,000 Poles employed in Iceland, down from twice that number before the onset of the economic crisis in that country.

The second change of the double tax treaty between Poland and Iceland concerns exchange of tax information. Put briefly, the scope of tax information exchanged between the two jurisdictions has been expanded. This change is likewise consistent with the general policy now being implemented by the Polish tax authorities. While art 26 of the original treaty from 1998 provided that exchange of tax information between Iceland and Poland is limited to the types of taxes expressly mentioned therein (i.e. the two basic income taxes in Poland and six enumeratively listed types of income and property taxes in Iceland), the new art 26 introduced by way of the protocol establishes legal basis for exchange between Iceland and Poland of any and all information of material significance for enforcement or implementation of internal laws concerning taxes, whatever their type or designation (such a formulation also covers, among others, indirect taxes and property taxes). Thus, at least in theory, the Polish tax authorities may now apply to their counterparts in Iceland for provision of tax information in the broadest possible scope, and vice versa. This possibility, however, is not likely to be resorted to on a mass scale in practice, in that the more common international tax planning solutions rarely utilise combinations of Poland and Iceland.

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