Changes to the double tax treaty between Cyprus and Poland

2012-03-28

 

Last week a protocol has been signed between the Polish and Cypriot Governments concerning amendments to the Cyprus-Poland Income and Capital Tax Treaty of 1992 (‘the Treaty’).
 
The most important changes include the following;
 
• a deletion of the tax sparing credit clause for dividends, included in the original agreement (this facility, generally speaking, allows for a deduction from tax payable in Poland over dividends received from Cyprus companies, even when such tax has not been withheld in Cyprus);
• a change of the method for double taxation avoidance, from the current so-called ‘exemption with progression method’ to the so-called ‘tax credit method’ (the latter method in general being less favorable than the former, for example with respect to directors fees received by Polish individuals from Cyprus companies);
• an extension of the Treaty to encompass a tax information exchange clause based on the OECD Model Tax Convention on Income and Capital;
• a reduction of withholding tax on dividends from 10% to 5% or 0%;
• a reduction of withholding tax on interest payments from 10% to 5%.
 
The existing provisions of the Treaty allow for a preferential taxation of dividends received by Polish residents from Cypriot companies (i.e. an effective rate of 9% only), as well as a tax exemption for remunerations received by Polish residents from memberships of boards of directors of Cypriot companies. After the entry into force of the amendments to the Treaty, such dividends and directors fees will be taxed in Poland according to the general principles (19% and progressive tax at rates between 18% and 32% respectively).
 
The above definitely does not mean that no tax planning opportunities, involving the use of Cypriot companies, will exist anymore after entry into force of the new provisions. A number of solutions will continue to be available, including:
 
• dividends paid by Polish companies to Cypriot holding companies will continue to be exempt from withholding taxation in Poland under mild conditions;
• profits from the sale of sale of shares in Polish companies by Cyprus companies will not be taxable in Poland and in Cyprus such gains will still benefit from full income tax exemption;
• gains accumulated in Cypriot companies can still be paid out as dividends to any foreign shareholder, without any (withholding) tax in Cyprus;
• any profits generated by Cypriot companies in connection with commercial activities (trading activities, servicing activities, licensing activities etc.) will still benefit from the lowest corporate income tax rate in the whole EU (12,5%; or even a tax exemption will apply, see also hereafter);
• gains from the sale of titles will continue to be income tax exempt in Cyprus etc.

Entry into force
 
The Polish Ministry of Finance has the intention to ratify the new Treaty before the end of this year and to have it into force as per the 1st of January 2013. If ratification does not take place before the end of this year, the date of entry into force of the new Treaty will probably be postponed to the 1st of January 2014. With this in mind, anyone who still wants to benefit from the provisions of the current Treaty, should seriously consider having their Cyprus companies making payments of dividends and/or directors fees before the end of this year.

Alternative solutions
 
Should you be interested in obtaining information about alternative solutions, which we have identified, please feel free to contact the Warsaw branch of Consulco, of which you will find the contact details below;
 
Consulco Poland Sp. z o.o.
ul. Mokotowska 57/5
00-542 Warszawa
tel.: +48 22 622 06 02
fax.: +48 628 17 46
e-mail: poland@consulco.com