The new treaties tend to be less favourable than the older ones
Albeit it requires increasing expenditure of time and resources, international tax planning remains possible.
Given the recent statutory amendments, is it still possible to plan out tax optimisation schemes at an international level ?
For quite some time now, the Polish Ministry of Finance has been endeavouring to limit the possibilities for such planning. The amendments also comprise many double taxation treaties, and soon to come are regulations concerning controlled foreign corporations, i.e. a system for taxing the income of some foreign companies controlled by Polish entities.
So what are the rules instituted by these new regulations ?
The first and foremost change refers to the basic method for avoiding double taxation. Generally speaking, the tendency in the Polish treaties is to abandon the ordinary, or proportional, accounting method in favour of exclusion with progression. The latter is becoming entrenched as the new default solution. This, in itself, tends to be favourable for taxpayers, but this change is often coupled with the insertion of switch-over clauses to the double taxation treaties. These clauses envisage unilateral change of the exclusion with progression method to the proportional accounting method in instances where application of the former would lead to double taxation. Such a switch-over clause has been incorporated, among other instruments, into the new protocol to the 1995 treaty with Luxembourg and to the 2009 treaty with Norway (2012) as well as to the new protocol to the 1994 treaty with Slovakia (2013).
Does this mean that the old treaties were more favourable from the perspective of the taxpayers ?
All in all, yes. Despite the amendments formally implemented in the treaties, some of them still remain in force in the older text, the one more beneficial to taxpayers. A case in point is provided by the new treaty with the United States signed on 13 February 2013. Its ratification by the American side is expected to take several more months, and the fact that November 2014 will bring elections for Congress is not likely to speed things up. The net effect is that the new Polish-American double taxation treaty will not become effective in practice until 2015 at the earliest.
Why is this delay favourable ?
While the new treaty does reduce the maximum income tax rate which may be applied to trans border license fee payments (from 10 to 5%), it also introduces the possibility of taxing interest at a rate of up to 5%, hereto non-existent. In this context, it might be recalled that the Polish-American treaty does not provide for taxation of interest at source (similar provisions may be found in the treaties with France from 1975, with Spain from 1979, and with Sweden from 2004); this element has often been employed in devising attractive structures for debt financing of transactions with the use of Swiss or Luxemburg branches of Polish companies. Polish tax optimisation practice is familiar with structures relying on branches of Polish companies operating in Switzerland or in Luxembourg, with financing provided by American entities in the form of loans. Seeing as the 1974 treaty does not provide for taxation at source of interest on loans paid on a cross-border basis – in the present instance, from the United States to Poland – a tax-neutral structure can be implemented in this way.
The definition of licence receivables presently in force does not encompass trans-border payments in consideration for use, or the right to use, of industrial, scientific, or technical assets – for, say, trans-border leasing of fixed assets, to use a somewhat less technical term. Accordingly, such payments are not subject to taxation at source. The new treaty introduces a broader definition of such receivables, with the result that they shall now be subject to a flat-rate income tax. This, in turn, may lead to an increase of the prices charged to Polish entities for such leasing services through application of gross-up clauses.
What other unfavourable results will the new treaty with the United States bring ?
Another new regulation is presented in the asymmetrical real property clause under which Poland may tax income from divestment of stock in a company where more than 50% derives, whether directly or indirectly, from real property located in Poland. There is also the new article on branch taxation and the difficult new anti-abusive regulation comprised in the limitation on benefits clause. In a nutshell, this latter clause limits the extent to which entities which are not economic residents of the contracting states may benefit from the treaty.
Are there any other treaties whose delayed coming into force will be favourable ?
We might mention the 1994 treaty with Slovakia, which has been augmented with an additional protocol dated 1 August 2013. Its provisions – more restrictive as far as international tax planning is concerned – will become effectively binding on 1 January 2015 at the earliest. The essence of the Polish-Slovakian optimisation structures based on the older treaty lies in utilisation of Cypriot capital companies and Slovakian limited partnerships in conjunction with the exclusion with progression mechanism, to the end of double non-taxation of dividends disbursed by the Cypriot company from dividends from a Polish capital company or from equity profits accruing to the Cypriot company.
What about the treaty with the United Arab Emirates ?
This treaty, signed in 1993, likewise remains in force in its previous text, although there have been suggestions that it may soon be supplemented with a new protocol. Some tax advisors continue to promote optimisation structures based on this treaty and on the fact that the United Arab Emirates do not levy personal income tax – a circumstance which, in conjunction with the exclusion with progression mechanism – enables, at least in theory, achievement of double non-taxation of income from a company based in the UAE.
But tax planning based on the treaty with the United Arab Emirates carries other risks ?
The problem with tax structures utilising companies incorporated in the United Arab Emirates is a complex one, and it concerns not so much the double taxation treaty as such, but rather other characteristics of the UAE tax system. For example, there is no possibility of obtaining a UAE tax residency certificate for a company operating in a free trade zone which conforms with the applicable Polish requirements. This is an issue for offshore companies whose actual operations are pursued outside the United Arab Emirates and which are registered in a free trade zone – they cannot obtain a certificate to the effect that they are subject to UAE tax. Albeit the directors' fees structure oftentimes used for this jurisdiction does not, at least in formal terms, require such a certificate, the question remains as to how a Polish taxpayer might demonstrate that he meets the statutory prerequisites for tax exemption of his earnings under the Poland-UAE treaty. The certificate of incorporation issued by the free trade area falls short in this regard, as held in the interpretation by the Director of the Treasury Chamber in Warsaw dated 25 April 2013 (ref IPPB2/415-65/13-4/ EL). To put it simply, registry documents issued in a free trade area will not do in lieu of a residency certificate.
And what about the treaty with Malta ? It has already been amended ?
The 1994 treaty in its current form continues to be of relevance for international tax planning proposes. Although it has been amended by way of an additional protocol dated 6 April 2011, it has no switch-over clause, so the exclusion with progression method applied on the basis of this treaty along with the system of refunding to shareholders taxes collected from the company provided for under Maltese law enables effective reduction of the tax on income from a company based in Malta.