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Tax Treaties: United States And Poland



Tax Treaties: United States And Poland

Quick Summary.  Situated in Central Europe, Poland is bordered by Germany, Ukraine, Russia, Belarus, the Czech Republic, Slovakia and Lithuania.  Poland is a republic with a bicameral parliament comprised of the Sejm and Senate.  Poland is comprised of 16 provinces.

The Constitution of Poland, which was adopted in 1997, serves as the supreme law and the legal system is governed by a code of civil law.  Poland’s judiciary serves as an independent branch of government and incorporates a four-tier court system headed by the Supreme Court.

Article 26(2e) of the Corporate Income Tax Act provides for new withholding rules and exclusions/restrictions that became effective in 2020.

In addition, in 2019, Poland introduced an “IP Box” tax relief program whereby income derived from “eligible intellectual property rights” is subject to a preferential tax rate.

Poland is a member of the European Union (EU), the North Atlantic Treaty Organization (NATO), the World Trade Organization (WTO), and the Organisation for Economic Co-operation and Development (OECD).

Treaty.  Convention between the Government of the United States of America and the Government of the Polish People’s Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Income, and a related exchange of notes, signed at Washington on October 8, 1974

Currency.  Polish Zloty (PLN)

Common Legal Entities.  Limited liability company, joint stock company, limited joint stock partnership, limited partnership, sole proprietorship, and branches.

Tax Authorities.  Minister of Finance, the Head of the National Tax Administration, Director of the National Tax Information

Tax Treaties.  Poland is party to more than 75 tax treaties and is a signatory to the OECD’s MLI.

Corporate Income Tax Rate.  19%

Individual Tax Rate.  32%

Corporate Capital Gains Tax Rate.  19%

Individual Capital Gains Tax Rate.  19%

Residence.  An individual is deemed a tax resident if their center of personal or economic interest is located in Poland or the individual has physical presence in Poland for more than 183 days during the tax year.

Withholding Tax.

            Dividends. 19%

            Interest.  20%

            Royalties. 20%

Transfer Pricing.  Poland generally follows the OECD’s guidelines and applies an arm’s-length standard.

CFC Rules.  Taxpayers may be subject to tax at 19% of the income of a related CFC.

Hybrid Treatment. No.

Inheritance/estate tax.  Yes.  Rates range from 3% to 20%.


OVERVIEW OF TAXATION IN POLAND

The republic of Poland is a parliamentary republic, divided into 16 regions (voivodships), each of which also has an elected parliamentary form of government. Poland acceded to the European Union (“EU”) and is a member of the European Economic Area (“EEA”). Its national currency is the Polish zloty (“PLN”).

The main taxes imposed by the Polish national government are the corporate income tax, a personal income tax, and the value-added tax (“VAT”). In addition, there are also national taxes on inheritance and gifts, civil law transactions, transportation, agriculture, forestry, as well as various excise taxes and custom duties. The central government imposes income tax on net income of both individuals and corporate entities, while regional or municipal authorities may adjust deductions and applicable rates and also impose license fees and indirect taxes on business activities. Residents are subject to tax on worldwide income while nonresidents are generally subject to tax only their income from Polish sources. Foreign tax credits are generally available to individual and corporate residents. Income is broadly defined and includes capital gains.

Tax reform aimed at tightening the tax system, combating tax evasion, improving compliance, and increasing the efficiency of tax administration was announced by the Minister of Finance in April 2014. The government has introduced the general anti-avoidance rule, and signed new agreements on the exchange of information with jurisdictions applying harmful tax practices.

Individual

Individuals residing in Poland are subject to tax on worldwide income, referred to in Poland as an “unlimited tax obligation.” Residence is determined either on the basis of a physical presence test, requiring presence during more than 183 days during a tax year, or a vital interests test, based on the presence of an individual’s personal and economic interests in Poland. The types of income subject to the personal income tax include most wages and earned income for services and property transfers. These items include pensions, rents, and other sources, but do not include gifts or inheritances. This taxable base is taxed at progressive rates based on both amount and type of income received. Residents are entitled to reduce their tax with a variety of deductions and credits.

Deduction of social security contributions is permitted, as are deductions for mandatory health insurance contributions.  Credits for charitable donations, contributions to individual retirement security accounts, as well as a child tax credit and internet tax credit are permitted. Qualifying married individuals may file jointly, provided that each spouse is a resident of either Poland, or Switzerland or a member state of either the European Union or the EEA.

Corporate

The corporate income tax in Poland is generally 19 percent of all net income. It applies to most entities that are resident in Poland other than partnerships. Taxpayers subject to this tax include not only corporations, but also joint-stock corporations. Limited partnerships were excluded from the category of corporate taxpayers by an amendment to the Corporate Income Tax Act. Although partnerships are not generally subject to the corporate income tax, foreign entities or partnerships that are treated as legal entities in the jurisdiction in which they are formed are also subject to the corporate income tax. An entity is a resident of Poland if its offices or management board is located in Poland. Resident companies are subject to tax on all income without regard to source, under the concept of “unlimited tax liability” similar to that applicable to individuals, but are generally relieved of double taxation by either foreign credits or an exemption from income under a participation exemption. Companies are entitled to consolidate for tax purposes, forming a tax capital group of related commercial companies all with residence in Poland. The tax capital group must meet other restrictions based on size and required consistency of reporting.

In determining the taxable base, income is determined by computing total revenues and reducing it by expenses related to producing the revenues. Cost-recovery through depreciation of assets and amortization of acquisition costs is permitted. In addition to a straight-line (“linear rule”) method, other methods are specified in the statute as permissible methods. Interest on business debt is generally one such deductible expense, but is limited in certain instances in which related party indebtedness results in thin capitalization or overleveraging. An entity is over-leveraged if the debt owed to a related party exceeds an amount three times the debtor’s total equity. Any interest paid attributable to the excess debt is disallowed. For purposes of these rules, a debt is considered to be between related parties if either the lender holds a 25-percent share of the voting interest in the debtor, or a holding corporation or shareholder holds a 25-percent voting share in both the lender and debtor.

Non-resident companies are subject to the same taxation regime as resident companies and “are subject to tax on their Polish source income, capital gains. Dividends, interests and royalties paid to non-resident companies are subject to a withholding tax.”  The withholding tax rate for non-resident companies is the same as for residents, which is 19 percent for dividends and 20 percent for interest and royalties unless a reduced tax rate applies under a tax treaty.

Participation exemption

For income derived from subsidiaries in Switzerland, any member state of the EU or the EEA, a participation exemption system exempts dividend income from tax. Dividends and capital gains from eligible foreign subsidiaries qualify for an exemption from the Polish corporate tax if the resident corporation owns at least 10 percent of the capital in the foreign company and has held the participation for at least a two year period, which may elapse after the date on which the dividend is payable. If the subsidiary company is located in Switzerland, the minimum required capital participation held by the Polish parent is 25 percent rather than 10 percent. A reciprocal exemption applies to withholding tax that would otherwise apply to dividend disbursements from a Polish resident company to the qualified subsidiaries.

Other Taxes

Value-added taxes

Poland enacted a VAT in 2004 that applies to taxable sales of goods and services, and conforms to EU requirements.  The VAT is an indirect consumption tax that is imposed at time of transfer and collected by a taxable person responsible for remitting the VAT to the tax authorities, and generally falls on the ultimate consumer of the goods or services. The amount of VAT paid by the taxable person in purchasing goods or services for his or her business offsets the amount of tax remitted to authorities.

In May 2014, the Polish Tax Administration issued a statement to the effect that the general rate VAT will be imposed on profits received from sales of Bitcoin.

Crossborder sales within the EU are eligible for a zero-rate VAT, because the offsetting VAT in business-to-business transactions are expected to be VAT neutral.

In the case of cross-border services, the authority to collect the VAT depends upon whether the transaction is business-to-business, or between a business and non-business service recipient. In the former instances, Poland is authorized to collect the VAT if the service recipient is a Polish resident. In the latter case, the converse is true. The VAT is collected in Poland only if the service provider is a Polish resident.

Inheritance and gift tax

A tax on inheritance and charitable donations is imposed on all receipts of assets or rights within Poland. In the case of beneficiaries who are residents or citizens of Poland at the time of the inheritance or donation, the tax is also applicable to the receipt of assets or rights that are located or used abroad. The degree of relationship of a beneficiary to the transferor and the value of the transfer determines the rate of tax applicable. The three categories of beneficiaries are (1) direct ascendants or descendents, whether by marriage or consanguinity, including parents, step-parents, children and spouses, siblings; (2) the parents’ siblings, siblings’ spouses and descendents; and (3) all other beneficiaries.

Have a question? Contact Jason Freeman, Freeman Law.

Jason Freeman

Mr. Freeman is the founding and managing member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney. Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service.
He was honored by the American Bar Association, receiving its “On the Rise – Top 40 Young Lawyers” in America award, and recognized as a Top 100 Up-And-Coming Attorney in Texas. He was also named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas” by AI.

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