Amendments on The Double Taxation Treaty Cyprus – Poland

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.

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