On 29 October 2020, a protocol amending the Convention between the Republic of Poland and the Kingdom of the Netherlands for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (hereinafter: “the Protocol”) was signed. Once in force, the Protocol is to introduce major amendments to the provisions of the double taxation treaty concluded between Poland and the Netherlands (hereinafter: “the Treaty”), having important implications, inter alia, for investment structures involving Polish and Dutch entities.
Protocol ratification status
According to the Protocol, it shall enter into force on the last day of the third month following the month in which the later of the notifications has been received in which the respective Governments have notified each other in writing that the formalities constitutionally required have been complied with. Its provisions shall have effect for taxable years and periods beginning, and taxable events occurring, on or after the first day of January in the calendar year following that in which the Amending Protocol has entered into force.
Consequently, for the Protocol to come into force with 1 January 2022, it should have been ratified by both countries by the end of September 2021.
In Poland, the Protocol must be ratified by way of an act. The ratifying act was submitted to the Sejm and scheduled for assessment during the seating starting on 29 September. However, taking into account that the act would still require the approval from the Senate and the signature of the President, the material provisions will not enter into force by the end of September 2021. Also in the Netherlands, the relevant ratification law has not yet been passed by the parliament.
In practice, this means that the Protocol provisions are to become applicable no earlier than on 1 January 2023.
One of the most important amendments provided for by the Protocol is supplementing the Treaty with a real-estate clause.
Under the clause, gains derived by a resident of a Contracting State from the alienation of shares in a company or comparable interests (such as interests in a partnership or trust), may be taxed in the other Contracting State if, at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 75 percent of their value directly or indirectly from immovable property situated in that other Contracting State. Consequently, the entry into force of the clause will give rise to tax on the alienation of shares (or other similar rights) in a company deriving more than 75 percent of its value from immovable property during the 365 days preceding the sale, payable in the country where the property is located.
Due to this change, transactions of alienation of shares in real estate companies based in Poland by entities based in the Netherlands should not be taxed in Poland until the end of 2022.
Furthermore, the Protocol is to introduce a solution commonly referred to as the principal purpose test, designed as a tool for counteracting any possible double taxation treaty abuse. Entry into force of the new mechanism may bring, inter alia, the obligation to collect WHT on payments made by Polish tax residents to entities seated in the Netherlands, according to the national rates (and excluding the rates and exemptions provided for by the Treaty), should the application of the Treaty provisions in given circumstances be considered abusive by tax authorities.
Significant changes to the definition of a permanent establishment are also planned. The Protocol brings, inter alia, a revised detailed catalogue of examples of activities excluded from permanent establishment activities, stipulating that all examples of this type of activities indicated in the Treaty (such as the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise) must be of preparatory or auxiliary character to preclude creation of an establishment.
Furthermore, the Protocol introduces the notion of “the recognized pension fund,” meaning an entity or arrangement treated as a pension fund under the taxation laws of the state of establishment, which is, inter alia established and operated exclusively or almost exclusively to administer or provide retirement benefits and ancillary benefits to individuals or that is established and operated exclusively or almost exclusively to invest funds of such entities.
Finally, the Protocol clarifies that income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent under the tax law of either Contracting State shall be considered to be income of a resident of a Contracting State but only to the extent that the income is treated, for purposes of taxation by that State, as the income of a resident of that State (the transparent entity clause).
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