Representatives of the governments of Poland and the Netherlands on 29 October 2020 signed a Protocol to amend the existing income tax treaty.
The Protocol must be ratified by Poland and the Netherlands to enter into force. The Protocol would enter into force at the end of the third month following the month of the mutual notification that both contracting countries fulfilled their constitutional conditions for its application and would apply to tax years, periods and taxable events taking place on the first day or after the first January of the calendar year following the year in which the Protocol enters into force (that is, no earlier than on 1 January 2022).
Real estate clause
The Protocol introduces a “real estate clause.” Under this clause, gains realized by a person having a place of residence or a seat within the territory of one of the countries from the alienation of shares or comparable rights (such as rights in a partnership or trust) may be taxed in the other country, if at any time during the 365 days preceding the alienation of these shares or comparable rights, their value derived directly or indirectly in more than 75% from immovable property located in the territory of that other country.
Principle purpose test
The Protocol also introduces a “principle purpose test” that aims to serve as an anti-abusive clause preventing abuse of agreements on the avoidance of double taxation. In general, the principle purpose test provides that no favorable provisions of a tax treaty may be relied on in a situation when obtaining the treaty benefit was one of the principal purposes of a given transaction. The test application, for example, may result in an obligation to collect withholding tax on payments made by Polish residents to entities based in the Netherlands at the domestic rates (excluding rates or exemptions provided for in the treaty), if in the given circumstances the application of the provisions of the treaty is deemed by the tax authorities as an abuse of its provisions.
The Protocol introduces amendments to the definition of permanent establishment. Activities that are not covered within the meaning of permanent establishment would be clarified by indicating that all exemplary activities indicated in the treaty (such as the use of facilities solely for the purpose of storage, display or delivery of goods or goods of enterprises) must be of auxiliary or preparatory nature in order not to result in a permanent establishment. The Protocol also stipulates that a permanent establishment would be created in a situation when a person acts on behalf of an enterprise in one of the countries and by undertaking these actions concludes contracts or habitually exercises a major role in concluding contracts without significant changes made by the enterprise, and these contracts are concluded on behalf of that enterprise; for the transfer of ownership or for the granting of the right to use property owned by that enterprise or that the enterprise has the right to use; or for the provision of services by the enterprise. Under the Protocol, the profits attributable to the permanent establishment would be the profits that could have been earned, by the permanent establishment in transactions with other parts of that enterprise, if the permanent establishment were a self-sufficient and independent enterprise engaged in similar activity under the same or similar conditions, having regard to the resources involved and the risks borne by the enterprise, establishment, and other parts of the enterprise.
The Protocol also introduces a definition of a “recognized pension fund,” indicating that it is an entity or a structure recognized as a pension fund under the law of the country of establishment which, inter alia, has been created and operates exclusively (or close to exclusively) to administer or provide pensions and supplementary benefits, or has been created and operates exclusively or close to exclusively to invest funds in such entities. In accordance with the Protocol, dividends and interest would not be taxed if a recognized pension fund is a beneficiary of such a payment. Furthermore, profits from the alienation of shares, in accordance with the real estate clause, by such a recognized pension fund would not be taxed in the state where the real estate property is located.
Tax transparent entity
The Protocol specifies that revenue obtained by or via an entity or structure that is fully or partially considered as tax transparent under the tax law of one of the contracting countries would be considered as revenue of a person having residency or seat within the territory of a given country to the extent that this revenue for the purposes of taxation by that country is treated as revenue of a person having residency or seat within the territory of that country (transparent entity clause).
Place of effective management
The Protocol also modifies the principle under which, when a legal person has its seat within the territory of two countries, it would be considered to have its seat in the country of its effective management. In such a situation, countries would undertake actions aimed at determining the state of seat in the course of mutual arbitration. If no agreement is reached, the person would not be entitled to any tax relief or exemption under the Convention.
The Protocol would not change the avoidance of double taxation method applied by Poland to its tax residents deriving income in the Netherlands (the proportional tax credit method will be continued). Consequently, Polish tax residents deriving income in the Netherlands will still be entitled to the abolition relief on the basis of the principles referred to in the provisions of the individual (personal) income tax law, but these rules may be subject to change.
Read a November 2020 report [PDF 246 KB] prepared by the KPMG member firm in Poland
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