The protocol amending the double taxation treaty between Cyprus and Poland has been signed on behalf of both countries on 16 March 2012. The protocol has been ratified by Cyprus on 30 March 2012. The protocol introduces a number of amendments to the existing Double Taxation Treaty, the summary of which are stated below:
1. Withholding tax on dividends
The withholding tax on dividends has been reduced from 10% to 0% provided that at least 10% of the share capital of the Company paying the dividends is held directly by a Company in the other contracting state for an uninterrupted period of 24 months. In all other cases the withholding tax is 5%.
2. Withholding tax on interest
The withholding tax on interest has been reduced from 10% to 5%.
3. Withholding tax on royalties
This remained at the rate of 5%.
4. Elimination of tax sparing clause
The tax sparing clause was the ability of the tax payer to reduce the effective tax rate in his country of tax resident by deducting the tax which normally should have been paid in the other contracting state as per the Double Taxation Treaty but actually has not been
paid in accordance with the local tax legislation. This was the case of dividends distributed by a Cyprus Company to a Polish tax resident where the effective tax rate in Poland was reduced to 9% from 19% since the Double Taxation Treaty provided for a 10% withholding tax on dividends but actually no withholding tax was paid in Cyprus.
Under the protocol, the tax in Poland is reduced only with the actual tax paid in Cyprus. However, in Cyprus no withholding tax is imposed on dividends paid to foreign shareholders therefore the tax to be paid on dividends in Poland will be effectively 19%.
5. Directors’ remuneration
An important amendment in the protocol is that the directors’ remuneration is taxable only in the country of residence of the director.
In accordance with the existing Double Taxation treaty, this remuneration was taxable in the country in which the Company was resident. This gave the ability to the Polish directors of Cyprus Companies not to pay tax in both contracting states. Under the Cyprus tax legislation, non Cyprus tax residents are subject to tax only on the income accrued or derived from sources in Cyprus provided that the individuals were physically in Cyprus exercising their duties. Since in the majority of the cases this did not apply then the remuneration was not subject to taxation in both contracting states. The Polish negotiators insisted on this change so as to stop this method of tax planning by Polish residents who were directors in Cyprus Companies.
In accordance with the protocol, the remuneration earned by Polish residents in Cyprus Company is subject to tax in Poland.
6. Exchange of information
The protocol replaces article 27 of the 1992 agreement with a new article under which it prevents tax authorities from any ‘fishing expeditions’ and safeguards the interests of
Entry into force and effective date
The protocol will come into force following ratifications by both contracting states as from beginning of the year following the year of ratification which expects to be on 1st of January 2013 onwards.
Please do not hesitate to contact our office in the case you need any clarifications.