Polish Tax on Cypriot dividends may change in future

According to Polish Ministry of Finance, persons receiving dividends from the companies in Cyprus should pay in Poland 19 percent of income tax instead of 9 percent.

As a result the Polish government wants to renegotiate the agreement on avoidance of double taxation with Cyprus.

However, in response, tax experts indicate that : dividends received from the Cypriot companies in which the wealthy Poles have an interest, may never get to Poland and then the treasury would not not get a dime.

Ministry of Finance has confirmed that on 10 November 2010, the Prime Minister Donald Tusk has given a permission to start renegotiation of a Protocol to the Agreement with Cyprus. MF has already taken steps to begin negotiations with the Cypriot side.

"The Polish side will seek to adapt the Polish-Cypriot agreement to the current policies of the Ministry of Finance. This policy includes adaptation of the treaties to OECD standards (inter alia conclusion clause on complete exchange of information based on section 26 OECD Model Convention) and to eliminate provisions that lead to double non-taxation of income category (tax sparing clause) "- MF has responded enigmatically to the query of Polish Daily “Rzeczpospolita”.

The mechanism against which the government wants to fight is very simple. Just put the money into a company in Cyprus (create a limited liability company and take up it shares), then the income tax imposed on dividend would  in an amount of  9 percent instead of 19 percent.  That is because the agreement on avoidance of double taxation guarantees 10-percent deduction.

There would be nothing strange, if not the fact that in Cyprus, this tax is not paid, but it is deductable in Poland. By changing the treaty, Polish government want to get the full amount of tax.

The question is whether the goal of MF can be achieved. The Cypriot companies are rather used by wealthier Poles. We can expect that after a possible change in the treaty, the dividends instead of going back to Poland will stay in Cypriot companies.

MF says, at the moment are no concrete solutions, nor the dates of entry into force of any changes, they will be determined during negotiations. According to experts, the possible date is 2012, and maybe even 2013.