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DTT interpretation

DTT interpretation

MLI Convention. Changes in DTT. Beneficial owner clause and Principal Purpose Test (PPT).

MLI Convention. Changes in DTT. Beneficial owner clause and Principal Purpose Test (PPT).

The day-to-day maintenance of proper tax settlements requires from a taxpayer an in-depth knowledge and ability to interpret the provisions of EU law and double taxation treaties (DTT) concluded by Poland. Frequently, both Polish tax residents and non-residents struggle with correct interpretation of the DTT provisions regarding e.g. the status of beneficial owner, prerequisites for the creation of a permanent establishment in Poland or taxation of share disposal transaction.

On 1 July 2018, the MLI Convention (Multilateral Instrument to Modify Bilateral Tax Treaties), modifying the content of many DTTs concluded by Poland, entered into force. Initially, the agreements with Austria and Slovenia will be amended with subsequent agreements being modified as the ratification process progresses in other countries. Currently, Poland has notified 78 agreements for modification and 46 partners from this group have already notified Poland. Therefore, the MLI will become a part of such a number of agreements. As a result, the interpretation of the DTT provisions must also include the amendments introduced by MLI.

The key change within the MLI is the introduction of a 'principal purpose test' (PPT) clause. This clause provides the tax authority with the possibility to challenge the tax benefit of a given DTT, if the obtaining of such a benefit was the only or one of the main objectives of the taxpayer's actions. Application of imprecise wording in the clause, such as "main objectives of the taxpayer's actions", leaves the authorities with room for interpretation and, as a consequence, may result in disputes between taxpayers and tax authorities.

In anticipation of such situations, the International Corporate Tax Team offers the following services to its Clients:

  • review and evaluation of taxpayers’ existing and planned structures and transactions in light of the applicable provisions of the DTT and of the risk of application of the PPT clause as well as with respect to other amendments introduced to the respective DTTs by the MLI Convention;
  • advisory services on possible modifications of the current structures in order to adapt them to amendments introduced by the MLI Convention into the tax law;
  • analysis of the provisions of the DTT regarding the creation of a permanent establishment in Poland, including submitting applications for individual tax ruling which would confirm the existence of the permanent establishment in Poland as well as review of the tax and legal obligations in Poland in this respect;
  • classification of income items earned by non-residents for source rules purposes.
  • tax settlements of non-resident taxpayers obtaining permanent establishment or other items of income sources in Poland.
  • application of exemptions / preferential rates under the DTT.
  • filing overpayment claims I, representation of taxpayers in front of tax authorities and courts in cases concerning DTT interpretation.

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