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Poland/US DTT - unlike any other

On 21 June 2013 a new double tax treaty (DTT) between Poland and US was accepted by Polish Parliament and will replace the previous treaty of 1974. Taxand Poland details the benefits and risks associated with the implementation of this DTT.

This new DTT will be effective:

  • with respect to withholding taxes for amounts paid or credited on or after the first day of the second month following the date of on which DTT enters into force
  • with respect to other taxes – for taxable periods beginning on or after the first day of January following the date on which DTT enters into force. 

This new DTT differs in many ways from the OECD model as it is partly based on the US framework, in particular including US “Limitation on Benefits” clause. and the DTT alsp introduces some new clauses not applicable under the current treaty. 

Listed below are the most significant changes being implemented as part of the new Poland – US DTT:

  1. Withholding tax on interest

The current treaty provides for an exemption of interest arising in one state and paid to the resident of the other state from WHT in source country. The exemption is widely used in optimisation structures, in particular those for Polish companies conducting business activity through a branch in Switzerland or Luxembourg, financed with loans granted by US entities. 
Based on Article 11 of the new DTT, WHT at a rate of 5 % of the gross amount of interest that will be introduced. 

On the other hand, interest determined on the below may be subject to WHT at a rate of 15%:

  • performance (eg sales, income, profits, cash flow) of the debtor or person related to the debtor, or
  • any change in the value of a property, or
  • any dividend, partnership distribution or similar payment 

Under the new DTT, WHT exemption will apply to interest only if the beneficial owner of interest is a resident of a contracting state and is either:

  • bank
  • pension fund (but only if pension fund does not derive interest from the carrying on of business activity)or
  • financing enterprise, not related with the debtor. 
  1. Dividends paid to Real Estate Investment Trust

WHT rate on dividends remains unchanged from the current treaty (ie 5% from the beneficial owner of a company, holding at least 10% of voting rights in the distributing company and 15 % in all other cases). However, exemption from WHT was historically introduced for dividends paid to pension funds and not derived from the carrying on of a trade or business by the pension fund. Special regulations have also been provided for dividends distributed by real estate investment trusts, provided that they fulfil certain criteria regarding, for example, their recipient status and shareholding level.

  1. Real estate clause for capital gains

The new DTT has also seen the introduction of a real estate clause. Based on this new clause, the capital gains are taxable in Poland if they are:

  • from alienation by a US resident of shares of a company deriving more than 50% of their value from real property situated in Poland, or 
  • from alienation of interest in a partnership or a trust whose assets consist of more than 50% of real property situated in Poland, or of shares of a real estate company

On the other hand, gains of a Polish resident that are derived from the disposal of real property interest in the US may be taxed in the US.

  1. Limitation on benefits clause

A new and extensive clause on limitation on benefits, based on the US model, has been introduced to the new DTT. The new clause imposes conditions for the treaty benefits, for example a definition of a “qualified person” has been implemented. The clause is designed to prevent residents of third countries from taking advantage of treaty benefits.

  1. Royalties WHT rate

The general WHT rate for royalties will be reduced from 10 to 5 % of gross the amount of royalties. In addition, the definition of royalty has been extended to the payments of any kind for consideration for the use of or the right to use any industrial, commercial, or scientific equipment. The new definition will result in WHT taxation of cross-border leasing payments.

Your Taxand contact for further queries is:
Andrzej Puncewicz
T. +48 22 324 59 49

Taxand's Take

It is not yet clear when the new DTT will become effective. Based on the publicly available information, the ratification procedure may not be finished in the US in 2013. 

Nevertheless, taking into account that the new treaty eliminates certain optimisation solutions (including WHT exempt financing by US entities), groups benefiting from the current treaty should consider amending existing structures to remain compliant and implement new structures to capitalise on potential opportunities.

It should be noted that such an extensive limitation on benefits clause is not included in any other DTT concluded by Poland. Thus, it is difficult to predict how the Polish tax authorities will apply this in practice. Multinationals should monitor this closely once the DTT becomes effective. 

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