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New protocol to Luxembourg-Poland DTT


On June 7, 2012, Poland and Luxembourg signed a protocol (the Protocol) amending the double tax treaty (DTT) initially signed in 1955. The key provisions of the Protocol are outlined below. Taxand Luxembourg explains how the Protocol will bring changes regarding the structuring of investments into Polish real estate.

Change in the taxation of capital gains derived from real estate companies
The current DTT allocates the right to tax capital gains on shares in companies to the state of residence of the seller. In line with the current OECD Model Tax Convention (MTC), the Protocol introduces new rules for the taxation of capital gains derived from the disposal of shares in real estate companies and allocates the taxing right to the state where the immovable property is located. Real estate companies are those deriving more than 50% of their value, directly or indirectly, from immovable property. As a direct consequence, gains derived by Luxembourg companies on the disposal of shares in Polish real estate companies will become taxable in Poland. So far, these gains were only taxable in Luxembourg (country of the seller) and could benefit from an exemption based on the participation exemption regime.

Taxand Luxembourg explores these amendments in more detail, including the limitations on benefits that this will incur.

Taxand's Take

As a positive change, the Protocol reduces the WHT rates applicable to certain types of income. The positive impact of this measure will however in most cases be rather limited given the more favourable rules already applicable at domestic and EU level under certain conditions. The Protocol further aligns the exchange of information provisions to the current OECD MTC. Finally, it may impact negatively investments in Polish real estate and the taxation of Luxembourg source dividends in Polish residents' hands. We recommend that taxpayers carefully review their investment structures in Polish real estate and in Luxembourg companies to mitigate any adverse tax consequence.

Your Taxand contacts for further queries are:
Keith O'Donnell
T. +352 26 940 257

Samantha Nonnenkamp

Taxand's Take Author