THE Isle of Man has signed three tax agreements with Poland.

The signings took place at the Polish Embassy in London yesterday (Monday) between the Ambassador of the Republic of Poland Her Excellency Barbara Tuge-Erecinska and Manx Treasury Minister Anne Craine MHK.

The three agreements are: a tax information exchange agreement (TIEA), an agreement for the avoidance of double taxation with respect to enterprises operating ships or aircraft in international traffic and an agreement for the avoidance of double taxation with respect to certain income of individuals.

Mrs Craine said: „The Isle of Man remains committed to tax transparency and effective exchange of information, particularly with its European neighbours.

„The signing of the agreements with Poland is further evidence of that commitment and also of the desire to build closer relations between Poland and the Isle of Man, especially in relation to the Island’s highly regarded shipping sector.”

The TIEA with Poland is the Island’s 20th TIEA and its 24th agreement that meets the Organisation for Economic Co-operation and Development’s (OECD) international standard on tax co-operation and transparency.

Source: John Gregory, www.isleofman.com

Under Polish commercial law  the partnerships do not have legal personality, but they can on their behalf acquire rights, including ownership of property and other rights in rem, assume obligations, as well as sue and be sued. 

The partnerships are treated as transparent entities for Polish income tax purposes. It means that the person liable to pay income tax on the partnerships’ profits is the partner and not the partnership itself.

The provisions of Polish tax law which regulate the partners’ obligation to settle income tax on the partnerships profits are vague. Therefore they have been subject to many advance tax rulings granted by the Minister of Finance in Poland and judgements of administrative courts.

The statutory interpretation of the Minister of Finance is unfavourable for the shareholders of a limited joint-stock partnership. It says that a shareholder of a limited joint-stock partnership is subject to the Personal Income Tax under the same conditions as other partners in personal partnerships, including general partners in limited joint-stock partnerships, i.e. the income attributable to the taxpayer under the articles of association is taxable as coming from the source: business activity. In consequence, a shareholder in a limited joint-stock partnership is under the obligation to make advance Personal Income Tax payments during fiscal year (every month), even if it has not received any dividend.

However recent judgments of administrative courts in Poland present an interpretation which is favourable for the shareholders. It says that the shareholders’ obligation to pay tax does not arise until the dividend is paid for their benefit.

Such an interpretation creates a reasonable space for tax planning opportunities for foreign and domestic partners.

The Polish government adopted a plan to raise the value-added tax rates in an effort to protect the country from public debt. The amendments would come into force as from 1 January 2011.

Currently Polish tax law provides for four VAT rates:

• the basic rate is 22%, which is applied to majority of goods and services;
• 7% – applies to specific goods and services, e.g. goods related to health protection, groceries, services of hotels, folk art articles;
• 3% – applies to supply of some farm produce; this rate is binding temporarily – until 31 December 2010;
• 0% – applicable to export, intra-Community supply of goods and international transport services (taxpayers enjoying 0% rate have the right to deduct input VAT suffered upon purchases related to the activities subject to this rate).

After the tax hike the VAT rates will amount to accordingly: 23%, 8% and 5% (zero rated supplies remain unchanged).

European Commission v Kingdom of Spain (C-487/08) – Spanish outbound dividends contrary to EU Tax Law

On 3 June 2010 the Court of Justice of the European Union (ECJ) gave its decision in the case of Commission v. Spain (C-487/08) where it was pointed out that that the different treatment of domestic and foreign shareholders under Spain’s participation exemption regime violates article 56 of the EC Treaty on the free movement of capital.

Under Spanish tax law questioned  dividends paid by a company resident for tax purposes in Spain are exempt from tax if the recipient of the dividend is a Spanish company holding 5% or more of the capital of the paying company.

For non-resident companies the minimum holding threshold was reduced from 20% to 15% in 2007, and then to 10% in 2009. The only criterion for more restrictive exemption requirement was the tax residency of the recipient company.

The ECJ held that the legislation was in violation of EU law because the difference in treatment was sufficient to discourage non-resident companies from investing in Spain.

It held that, because the Spanish government did not present any public interest evidence to justify the unequal treatment, the Commission’s complaint in respect of the Spanish legislation was justified.