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Switzerland – Poland Double Tax Treaty Protocol Captures Interest from Tax Authorities and Investors
Recently Polish tax authorities have made public the protocol from negotiations with Swiss tax authorities (Protocol) regarding changes in the double tax treaty (the Treaty) signed between both countries. The Protocol signed on 20 April 2010 formally marks the end of negotiations between the parties. Whilst nothing is certain until ratification in both countries, it is highly unlikely that any further major changes will be introduced. Taxand Poland and Taxand Switzerland investigate the impact of the Protocol for multinational businesses and consider the points of interest for both tax authorities and investors.
The Protocol adds to the Treaty an article on exchange of information. This is a particularly topical issue in the world of taxes and governments as more and more countries push Switzerland to cooperate at the level of tax authorities. Switzerland has recently renegotiated about 20 treaties to include the exchange of information provision. Under the G20 black list theme, it had an obligation to conclude at least 12 treaties with an information exchange clause by the end of 2009. It is in this context that the change should be seen.
Clearly the intention behind this is to enable tax authorities of other states to verify the tax position of their residents and also to what extent they perform operations in Switzerland. The Protocol directly states that the state cannot decline supply of the information only due to the fact that it is held by banks, financial institutions or nominee/fiduciary agents.
At this stage it is difficult to predict to what extent Polish tax authorities will start using this tool. Currently it is not that common to use exchange of information rules from other treaties. Nonetheless, once they decide to do it, they will have a formal weapon to employ. This is a change for any taxpayers investing in Switzerland and hoping to benefit from traditional high level of confidentiality applied by Swiss institutions. The good news for them, however, is that the exchange of information rules are only applicable with respect to tax years starting after 1 January of the year that follows the entry into force of the Protocol. More importantly, Switzerland will only provide information under the new provision if the state gives the exact name of the taxpayer and the exact place at which information is expected to be. This makes it doubtful as to whether the new instrument will prove truly valuable: in fact the Polish tax authorities will have to be fairly well-informed before the Swiss will participate in securing and exchanging information.
The Protocol also changes rules for the taxation of cross-border transfers of dividends, interest, royalties and shares. This will be relevant for multinationals involved in cross-border transactions and active in international structuring.
The change of the highest potential impact on businesses is in the taxation of royalties. Currently the Treaty provides 10% withholding (WHT) rate - but at the same time the protocol to the Treaty indicates that as long as Switzerland does not impose WHT under its local tax rules, royalties may be taxed only in the country of its recipient. Since Switzerland currently does not charge WHT on payments abroad this effectively means that payments from Poland to Switzerland are exempt from WHT (without any additional shareholding/holding period conditions). This treatment is certainly beneficial to businesses, in particular given the favourable taxation rules of Swiss entities receiving foreign royalty-type income (e.g. license fees). At the same time, the current wording of the Treaty is to some extent unclear as it requires familiarity with the Swiss local tax system to interpret consequences on payments from Poland. In addition, given that local law may change faster than a bilateral agreement, any cross-border structure involving royalties has a certain amount of instability embedded.
Under the Protocol this is to be changed - the standard WHT rate is to be 5% whilst entities meeting criteria from the Interest Royalties Directive will be able to benefit from the exemption from WHT. Any references to local Swiss law are deleted. Considering that exemption from the directive is to be implemented into the local tax law system of both countries anyway and that it requires meeting certain conditions, it means that effectively the Protocol increases the WHT rate on payments made from Poland to Switzerland for entities not meeting the exemption criteria. The important message is that those new rules will apply starting from 1 July 2013 (which coincides with the deadline for Poland to fully implement the Interest Royalties Directive, i.e. 0% WHT rate on payments between qualifying entities). Until that time the present rule will apply, meaning currently that no WHT will be charged on royalties even between non-related entities. Therefore, there should be sufficient time to re-model structures where 5% WHT will apply going forward resulting in additional ultimate cost.
Similar rules are to be introduced for interest. The current 10% rate is to be replaced by a general 5% rate and 0% for entities meeting the Interest Royalties Directive criteria. Again exemption from withholding tax for entities meeting the Interest Royalties criteria anyway should be implemented in local tax rules (although Poland is still allowed to apply 5% WHT on the interest until 1 July 2013). This change is also to be effective as of 1 July 2013.
This change will no doubt be of interest to business, given the relatively low WHT rate and the potential for combining it with a preferential local income tax rate in Switzerland. The reduction of the rate for all other cases may potentially increase interest in the structuring of financing of Polish investments through Switzerland. Due to lack of any specific effective rules for financial instruments in local Polish system, the reverse way of structuring is rather unlikely to gain any interest.
The change in taxation of dividends may seem at first glance important as the rate is reduced from 5% to 0% in certain cases (recipient being a company other than partnership and holding 10% of shares with 24-month uninterrupted holding period). It remains at 15% in all other situations (individuals, partnerships, minor shareholders). However, the 0% rate conditions are just a reflection of rules which anyway should be implemented into local tax system of Switzerland and Poland - they result from EU Parent Subsidiary Directive which also applies to Swiss companies. Therefore, in fact one may say that the Protocol itself only worsens the situation of shareholders which for whatever reason hold (or will have held) 25% of shares for less than 24 months - instead of paying 5% under the current version of the Treaty they will pay 15% after the Protocol enters into force. Nevertheless, in practical terms it is hard to imagine that this change could have a major impact on cross-border operations.
Finally, the Protocol changes the rules for the taxation of capital gains. Gains from alienation of shares deriving more than 50% of their value (directly or indirectly) from real estate may be taxed in a country where the property is situated. Currently this is not the case. In other words, the sale of shares in a Polish company held by Swiss shareholders will be taxed in Poland if the Polish company holds real estate and this property influences the value of its shares by more than 50%. Moreover, the rule should also be applicable if a Polish company subject to sale holds shares in its subsidiaries having real estate. From a purely technical perspective this change is quite significant. In practice, however, it is unlikely to have a major effect on real estate business. Real estate investments in Poland are held mainly through Luxembourg, Dutch or Cypriot holdings - Swiss holding companies are rarely used for such purposes. Therefore, this may have an impact on certain particular investments but should leave the real estate industry as such mainly unaffected.
Tax authorities interested in the operations of their taxpayers in the other country will be given an important procedural tool. This can be viewed as a "concession" from Swiss authorities traditionally defending world-wide recognised Swiss confidentiality. This change will be mainly of interest to tax authorities, but if implemented and used effectively, may also have a bearing on investors.
The amendment generally introduces more favourable WHT rates. However, on closer inspection it is apparent that these rates would be applicable anyway based on EU Law (and Swiss acceptance of it). In practice the key changes are the reduction of general WHT rate on interest down to 5% and the effective increase of WHT rate on royalties to 5% - these may have a direct impact on businesses.
Last but not least - the Protocol is not ratified yet but in all probability this will happen sooner or later. The moment of entry into force of changes should also be monitored to fully understand how the Treaty will work in the future.
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