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Amendments to the Luxembourg-Poland Tax Treaty - 15/06/2012


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Significant amendments to the Luxembourg-Poland Tax Treaty

On 7 June 2012, a protocol amending the Convention between the Grand Duchy of Luxembourg and the Republic of Poland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital (the “Treaty”) was signed.

The protocol provides for a number of amendments to the Treaty, most significant of which are: the introduction of a capital gains provision targeted at real estate companies (“land-rich provision”), the abolition of the Polish exemption of Luxembourg dividends and the introduction of a provision to exchange information upon request.

Taxation of capital gains derived from real estate companies

  • The existing treaty provides that capital gains derived by a Luxembourg company from the sale of shares held, directly or indirectly, in a company holding real estate in Poland shall only be taxable in Luxembourg. Such capital gains generally benefit from the Luxembourg participation exemption regime.
  • With the introduction of the land-rich provision, Poland shall be allowed to tax capital gains realized by a Luxembourg company upon the sale of shares held (directly or indirectly) in a company holding real estate in Poland.
  • Real estate companies refer to companies whose shares derive more than 50% of their value directly or indirectly from immovable property, including real estate.
  • There are various solutions available at Deloitte to manage any adverse tax implications, even for an exit made after the above amendment enters into force.

Change in the method for the elimination of double taxation

  • The protocol amends the methods for elimination of double taxation of income or capital under articles 7 (business profits), 10 (dividends), 11 (interests), 12 (royalties), 13 (capital gains) or 14 (independent personal services).
  • For Polish residents deriving such type of income that can be taxed in Luxembourg, the tax credit method will now apply in Poland (whilst the existing treaty provides for a tax exemption in Poland). The same approach will also apply to Luxembourg residents deriving such type of income that can be taxed in Poland.
  • This will have a huge impact for Polish residents investing in Luxembourg SICAV/SICAF (or holding shares in Luxembourg resident company) as Luxembourg-source dividend income should now be subject to tax in Poland. The need to adapt the SICAV/SICAF by-laws and prospectus should be carefully considered.
  • We are currently investigating with Deloitte Poland how the adverse tax implications could be addressed.

Other important amendments to the Treaty

  • Reduction of withholding taxes on interest and royalties from 10% to 5%;
  • Reduction of withholding tax on dividends to 0% if the receiving company directly owns at least 10% of the capital of the company distributing the dividends for an uninterrupted period of 24 months;
  • Limitation of treaty benefits: Payments made or income received from so-called artificial arrangements will no longer be allowed to benefit from the Treaty; and
  • Introduction of a comprehensive exchange of information clause.

Amendments to the Treaty will apply to the taxes paid for any tax year starting on 1 January (or after this date) in the calendar year following the year in which the instruments of ratification have been exchanged i.e., after 1 January 2013 if the ratification process is completed in 2012, or possibly after 1 January 2014 if the ratification process is more time-consuming and ends in 2013.

With respect to withholding taxes, the amendments will apply to income derived on the first day, or, after that date, of the second month following the date on which the protocol enters into force.

Should you have any questions regarding the amendments to the Treaty or wish to discuss the implications of the protocol on your group, please do not hesitate to contact us.

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