Public protest leads to tax changes

It is very rare that demographic shifts and rowdy protests bring about changes in the staid world of international taxation, but the emigration of some 600,000 Poles to the United Kingdom since April 2004 and the resultant demonstrations during Prime Minister Kaczyński's official visit in 2006 led both countries to draft and implement a new double taxation avoidance agreement (DTA) in record time.

Most Polish emigrants have left Poland due to a lack of economic opportunity and many of them have a negative view of the Kaczyńskis and the governing coalition. Prime Minister Kaczyński was faced with vocal demonstrations demanding that either Polish tax rules or the DTA be changed so that Poles living and working in the UK would pay tax only there.

Ghost of taxes past

The main problem with the old agreement, which had been in place since 1976, was that the earnings of Poles working and living in the UK remained taxable in Poland, with credit being given for tax paid in the UK. Both Poland and the UK have a top income tax rate of 40 percent, but the Polish top rate comes in at a much lower income threshold than the UK, which meant that almost all Poles working in the UK had to file personal income tax returns and pay the difference to the Polish tax authorities.

However, nearly all DTAs which Poland has concluded since 1990 provide that a Polish person working in another country will pay income tax only in that country and Poland will exempt that income from taxation. Under this concept of exemption with progression, such income is taken into account to calculate the rate of tax which should be applied to any other income which is taxable in Poland.

The new agreement

The new DTA came into effect on January 1, 2007, in Poland and from April 2007 in the UK, and while it does not address the problem of double taxation in earlier years with respect to employment income, it now provides that Poles working in the UK will pay income tax only in the UK. There is an exemption to this general rule with respect to Poles delegated to work in the UK by a Polish company for 183 days or less in a 12-month period. These remain subject to Polish income tax and are exempt from UK taxation on such earnings.

This is not such a key change for UK nationals working in Poland because of the more straightforward tax residency rules in the UK, which allow expatriates to become immediately non-resident if they leave the UK to work abroad.

The situation regarding capital gains has also been clarified. Polish and UK investors can freely invest in shares and bonds, listed and unlisted, in the other country and any gains will be taxed only in their country of residence.

There is an exemption from this rule with respect to shares in non-publicly traded companies, the assets of which principally comprise land or buildings. Any capital gain from these may also be taxed in the country where the shares are registered. Credit will be given for any tax paid against home-country taxation.

The old versus the new

Under the old DTA, the standard rate of withholding tax on dividends was 15 percent with a further preferential rate of five percent if the recipient of the dividends was a company, which owned at least 10 percent of the share capital of the paying company.  The new DTA introduces a standard rate of 10 percent with a further preferential rate of zero if the recipient of the dividends is a company which has owned or which will own at least 10 percent of the share capital of the paying company for an unbroken period of 24 months.

The rate of withholding tax on royalties (as well as license and know-how payments) has been reduced from 10 percent to five percent.

While these two changes have been well received by tax advisors and their clients, the situation with regard to interest has actually changed to the detriment of taxpayers.

Under the former DTA there was no withholding tax on interest. The new DTA imposes a five-percent rate of withholding tax, although there is an exemption with respect to loans made by banks and equipment leasing.

In order to apply the rates under this or indeed any DTA, the paying company must obtain a certificate of fiscal residency from the recipient company or individual before making the payment. The recipient company can obtain this from their tax office.

Richard Wernick

Richard Wernick is managing director of Totalserve (Polska) Sp. z o.o. He is a chartered tax advisor and registered trust and estate practitioner and has been practicing in Poland since 1997