Changes to Polish Corporate Tax Law

Paris, 04 février 2011 

Le Parlement polonais vient d'adopter plusieurs mesures affectant la planification fiscale internationale. Les nouvelles dispositions les plus notables concernent 1) les réductions de capital et les apports de titres 2) les flux de redevances, intérêts et dividendes et 3) les fonds d'investissement et de pension.

The Polish Parliament passed legislation that changes the Polish Corporate Income Tax (“CIT”) Law affecting international tax planning. Significant amendments affect the taxation of share redemption, interest, royalties and dividends, share-for-share exchanges and EU/EEA resident investment and pension funds. Most amendments became effective on January 1, 2011.

Redemption of Shares

Polish Law provides three types of share redemption: voluntary, automatic and forced. Currently, the payments relating to all three are treated as dividends. Under the amended provisions, remuneration for voluntarily redeemed shares will be treated as a capital gain taxed in Poland at the standard rate of 19%. As a result, the tax exemption for a payment received in exchange for such redemption of shares will not be applicable under the EU Parent-Subsidiary Directive.

However, in most cross-border transactions, share redemptions should not be subject to Polish tax based on the relevant double tax treaty (under the capital gains article).

Interest, Royalties and Dividend Payments

Implementation of EU Parent-Subsidiary Directive

Poland has introduced additional conditions for applying the withholding tax (“WHT”) exemption on dividend payments (resulting from implementation of the EU Parent

Subsidiary Directive into Polish CIT Law). Effective January 1, 2011, a dividend paid to an entity which is tax resident in Poland, the EU or any EEA country (Norway, Iceland or Lichtenstein) will be exempt from Polish WHT if, in addition to the existing conditions:

• the company receiving the dividend is not tax-exempt in its country of residence on all of its income, regardless of source
• a legal basis exists for obtaining tax information from the tax authorities of the dividend recipient’s country; and
• the recipient of the dividend directly owns shares in the Polish company - some exceptions do apply for this condition.

Implementation of the EU Interest - Royalties Directive

Under the amendments, the reduced 5% WHT rate on interest and royalties (and exemption effective July 1, 2013) will also apply to EEA countries.

In addition, the three conditions mentioned above in the context of dividends must also be met for interest and royalties.

Dividend, Royalties and Interest - New Obligation for Tax Remitters applying the EU Directives

To apply the WHT exemption on dividends and the reduced rate on interest/royalties, the tax remitter will, beginning January 1, 2011, require that the recipient provides a written statement confirming that it is not exempt from tax on all its income. The recipient must also provide a certificate of its tax residence.

If the dividend/royalty/interest is paid to a foreign company's foreign PE, the tax remitter must hold a certificate confirming existence of a PE issued by the tax authority of the country in which (i) the company is registered (or managed) or (ii) where the PE is located.

Share for Share Exchange

Currently a share-for-share exchange does not trigger CIT consequences on execution, provided that the acquiring and the target company meet an EU/EEA residence test, i.e. both are tax residents subject to tax on their worldwide income in EU or EEA countries. The amendments now extend this test to all entities involved in the transaction. As a result, existing shareholders of the target company must also meet the EU/EEA residence test.

Ending Tax Discrimination

Under the amendments, if certain conditions are met, then EU and EEA-located investment funds and pension funds will benefit from a tax exemption on income derived from Poland. This change is intended to make the relevant Polish regulations compliant with EU Law. 
Most requirements are similar for investment and pension funds. The exemption is applicable to collective investment institutions and entities running pension programs that:

• are located (resident) in an EU or EEA country with which Poland has a double tax treaty and the treaty contains an exchange of information clause;
• are subject to tax on income (regardless of its source) in their country of residence;.
• run their business activity under a permit from the competent authority;
• are supervised by competent authority; and
• have an asset depository.

Furthermore, (i) investment institutions are solely engaged in the collective investment of funds gathered in public or non public offers relating to investing in securities, money market instruments and other property rights; and (ii) pension funds are solely engaged in gathering funds and investing them in order to pay pension benefits to eligible participants.

In addition, the fund must: possess a tax residency certificate issued in the country of the fund's location, submit a statement confirming that the fund meets the conditions stipulated above, and demonstrate that it is the beneficial owner of income derived from Poland.

Utilization of Tax Credits for a Polish PE

Currently, only Polish tax residents subject to Polish taxation on their worldwide income may credit tax paid in a foreign country against Polish CIT if certain conditions are met. 
Effective January 1, 2011, a Polish PE of an entity that is tax resident in an EU/EEA country is allowed to credit foreign tax against Polish CIT as well, provided that the double tax treaty between Poland and the home country of the PE provides for allocation of revenue earned outside Poland to the PE in Poland.

Application of Benefits

Dividends, royalties and interest paid will only benefit from the provisions if the recipients country of residency has a double tax treaty with Poland in force that includes an exchange of information clause (this would exclude Switzerland, as the protocol introducing the exchange of information clause is concluded but will be effective only after the ratification process is complete, unlikely to be earlier than in January 2012).