The new protocol (the "Protocol") to the tax treaty (the "Treaty") for the avoidance of double taxation between Luxembourg and Poland was signed on 7 June 2012. The Protocol updates the Treaty in line with the current OECD standards with respect to the taxation of capital gains on real estate companies and the exchange of information. The Treaty also notably switches from the exemption method to the credit method for the elimination of double taxation on certain incomes earned by Polish residents.

The most salient changes can be summarized as follows:

  • The reduced withholding tax rate on dividend distributions is lowered from 5% to 0% when the parent company holds 10% of the share capital of the paying subsidiary for an uninterrupted period of 24 months preceding the dividend payment. The maximum rate of 15% in all other cases remains unchanged. For interests and royalties, the Protocol provides for a reduced 5% withholding tax rate (instead of 10% currently).
  • The Protocol attributes the taxing rights to the source State for capital gains on disposal of shares of real estate companies, i.e. companies deriving more than 50% of their value directly or indirectly from immovable property situated in the source State. Such clause may have an impact on existing real estate structures involving Luxembourg holding companies.
  • With respect to Polish residents, the method for elimination of double taxation will switch from the exemption to the credit method for dividends, interests, royalties, business income or income from independent activity.
  • The Protocol introduces the standard OECD clause on exchange of information upon request.
  • The Protocol provides a limitation of benefits clause that will disallow treaty benefits to income received in relation to an "artificial arrangements".
  • The Protocol will enter into force upon exchange of instruments of ratification the mutual notification upon the completion of domestic procedures of enactment. The provisions regarding withholding taxes shall be applicable as from the first day of the second month following the date of entry into force while provisions on other taxes shall be applicable as from 1 January of the tax year following the entry into force.

While the Protocol is not expected to be applicable before 2013, a number of existing structures will have to be revisited in the light of the Protocol. This include in particular real estate structures involving Luxembourg companies holding directly or indirectly properties located in Poland and structures taking advantage from the exemption in Poland of dividend distributed by Luxembourg companies under the current treaty.

Wildgen would be pleased to assist you in this process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.