Amendments To The Dutch-Polish Double Taxation Treaty
The protocol on the amendment to the convention on the avoidance of double taxation signed in October 2020 indicates a number of changes – among others in the fields of permanent establishment, profits from real estate or pension funds. An anti-abusive clause has also been added. The changes may affect residents of the Netherlands as well as Poland who have ties with both of these countries.
The date of entry into force of the updated version of the treaty depends on the duration of the ratification process and has not yet been confirmed. Probably the new provisions will apply to factual situations occurring from the tax year 2022.
The most important changes are presented below (the article numbers of the updated version of the treaty are put in parentheses).
Transparency clause (Article 1)
Income obtained through a (partially) transparent entity under the tax laws of either country will be considered as resident’s income – but only to the extent that this income can be attributed to him.
Recognized pension funds (Article 3)
The new version of the convention will include its own definition of a recognized pension fund. For the purposes of the Dutch-Polish treaty, it will be a separate entity or structure existing under the tax regulations of either of the countries. Such an entity or structure must operate (almost) exclusively for the purpose of managing and paying out pensions or making related investments.
Mutual agreement on the residence of a legal person (Article 4)
For the purposes of the convention, a legal person resident in both states within the meaning of the “basic” provisions of Article 4 should be considered to be resident of the state where effective management is carried out or where that legal person is incorporated. Other criteria relevant in a given case may also be considered. If the Netherlands and Poland fail to reach an agreement on residence on the basis of the above regulations, such person will not be entitled to any exemptions or deductions provided by the treaty.
Permanent establishment (Article 5)
In line with the latest OECD recommendations, the definition of a foreign permanent establishment has been further specified. In practice, a permanent establishment may also exist in case of activities such as storage, maintenance and supervision, storage for delivery purposes – as long as the said activities are of more than auxiliary or preparatory nature. The latter criterion is discretionary and may lead to divergent interpretations and, consequently, to disputes with the Dutch or Polish tax office.
A special case of a permanent establishment is the so-called foreign dependent agent. According to the new wording of the treaty, even if the agent does not ultimately sign the
contracts, but in practice his activities significantly contribute to their conclusion, a permanent establishment will still exist. As above, it is a discretionary criterion.
Income treated as dividends (Article V of the protocol on Article 10 of the convention)
Income from the (partial) liquidation of a company as well as income from purchase of own shares by a company will be treated as dividends.
Real estate clause (Article 13)
Gains from shares, interests, etc. in a foreign entity which over the past year had at least 75% of its value in real estate, may be taxed in the country of the real estate. However, such profits from recognised pension funds will be taxable in the fund country.
Pensions (Article 18)
Pursuant to the new version of the convention, retirement (and similar) benefits may be taxed primarily in the country where such benefits arose. This means a departure from the current principle of exclusive taxation of pensions in the country of residence of the beneficiary.
Principle purpose clause (Article 29)
The new version of the convention introduces a provision that conditions the granting of any deductions or exemptions. Its aim is to prevent the attempts of treaty abuse for tax avoidance purposes. Thus, if obtaining a tax advantage was one of the main goals of a given structure or transaction, and at the same time it was not in line with the objectives of the convention, the relief will not apply.
The issue of tax evasion and avoidance is also included in the new preamble to the convention.
No changes to the method of double taxation avoidance
The updated version of the convention will maintain the existing methods of avoiding double taxation described in Article 23. For Polish residents this means that the ordinary credit method will still apply. Thus, the changes in the national regulations regarding the significant limitation of the so-called abolition relief remain relevant.
Author: Paweł Zieliński
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