Tag: double taxation avoidance agreement

Tag: double taxation avoidance agreement

Taxation of dividends paid by a Polish company to non-Polish individuals. Warsaw, September 6, 2022

According to Polish tax law, there is a general rule that a flat-rate tax of 19% is charged on income paid in the form of dividends.  If a dividend is paid by a Polish company, it withholds tax on that dividend.

The company then transfers the tax withheld to a relevant tax office.  Failure to do so (e.g., failure to withhold tax and/or transfer the correct amount of tax to a tax office) may constitute a violation of fiscal criminal law and may be subject to fiscal criminal liability.  Fiscal criminal liability is borne by specific individuals responsible for the correct tax settlement, not the company itself.

The above standard tax rate (i.e., 19%) may be reduced depending on how this matter is regulated by a double taxation avoidance agreement concluded between Poland and the country of the dividend recipient.

The application for the reduced tax rate resulting from the double taxation agreement is possible providing that the place of residence of the dividend recipient is properly documented with a certificate of his tax residence.  Therefore, one should make sure that the certificate of tax residence meets the conditions set out by the law in order not to be exposed to the aforementioned criminal liability.

For example, according to the OECD Model Tax Convention (a model for countries concluding bilateral tax conventions), dividends paid by a company established in Poland to a resident of a foreign country may be taxed in Poland.  However, the tax charged may not exceed 15% of the gross amount of the dividend.  If the Polish company does not receive a tax residence certificate from the shareholder (i.e., the dividend recipient) or the certificate does not meet certain formal conditions, then the Polish company will not be entitled to apply the reduced tax rate resulting from the relevant double taxation agreement.

Moreover, the fact that the dividend paid (by a Polish company to a resident of another country) will be taxed in Poland does not mean that such a dividend cannot be taxed in that other country, as well. The provisions of most double taxation agreements explicitly stipulate that dividends may be taxed in both countries. On the other hand, if the dividend could be exempt from taxation in that other country (as long as the internal regulations of that other country allow such exemption), it will not result in the dividend not being taxed in Poland.

In other words, foreign rules will not apply in Poland.  A Polish company paying dividends will have to apply Polish tax regulations and will not be able to apply tax regulations of another country.  On the other hand, the recipient of the dividend (i.e., a foreign tax resident) will most likely have to make his tax settlements according to the tax regulations of his/her country of tax residence, taking into account the tax paid (withheld) in Poland.

Therefore, it should be examined if another country has the analogous rules as Poland with regard to dividends received by Polish residents from abroad.  According to Polish regulations, if a Polish tax resident receives a dividend from abroad, his/her income is taxed with 19% Polish tax on dividends.  However, from this calculated amount, he can deduct (provided certain conditions are met) the tax paid abroad (e.g., withheld by a foreign company) but still no more than 19%.  Any difference created in this way is subject to payment to a Polish tax office.  The shareholder (Polish resident) shows both the income and the amounts of Polish and foreign taxes in his annual tax return.

It is worth pointing out that the above general principles may be subject to certain modifications depending, inter alia, on the rules on which a Polish company is taxed. Other circumstances concerning the foreign resident’s relation with Poland or the nature of his ties with Poland may also be relevant.

Bernard Łukomski
Attorney at law
Tax advisor