The Protocol amending the double tax treaty, signed in October 2020, means a number of changes for taxpayers with ties to Poland and the Netherlands – including with regard to permanent establishments, profits from real estate or pension funds. An anti-abuse clause has also been added.
The treaty in its new wording applies to taxable events occurring from 1 January 2023. We outline the most important changes below.
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Transparency clause
Income earned through an entity that is (partially) transparent under the tax laws of either country is deemed to be income of the resident – but only to the extent that the income is attributable to the resident.
Recognised pension funds
The treaty in its new wording has gained its own definition of a recognised pension fund. For the purposes of the Polish-Dutch treaty, it is a separate entity or structure existing under the tax laws of one of the countries. Such an entity or structure must function (almost) exclusively for the purpose of managing and paying out pension benefits or making related investments.
Agreement on the residence of a legal person
For the purposes of the treaty, a legal person that is a resident of both countries within the meaning of the primary provisions of Article 4 should be deemed to be a resident of the country in which effective management is exercised or in which the legal person is incorporated. Other criteria of relevance in a particular case may also be considered.
If Poland and the Netherlands do not reach an agreement based on the above guidelines, such a person will not be entitled to the exemptions and deductions provided by the treaty.
Permanent establishment – w PL wersji ten nagłówek nie jest wytłuszczony
In line with the latest OECD recommendations, the definition of a foreign permanent establishment has been tightened. In practice, a permanent establishment may also develop in activities such as warehousing, maintenance and supervision, storage of goods for delivery – provided that the said activities are more than ancillary or preparatory in nature. The latter criterion is discretionary and may lead to divergent interpretations and consequently to disputes with the Dutch Tax Authority (Belastingdienst).
A special case of a permanent establishment is the so-called foreign dependent agent. According to the new wording of the treaty, even if the agent does not formally sign contracts, but in practice their activities significantly contribute to their conclusion, a permanent establishment would still be formed. As above, this is a discretionary criterion.
Income treated as dividends
Income from the (partial) liquidation of a company as well as income from the acquisition of a company’s own shares are to be treated as dividends.
Immovable property clause
Profits from shares, stocks, etc. in a foreign entity that had at least 75% of its value in real estate over the past tax year may be taxed in the country of the real estate. In contrast, such profits of recognised pension funds are taxable in the state of the fund.
Pensions
Under the new version of the treaty, pensions (and similar benefits) may first be taxed in the state where such benefits arose. This marks a departure from the previous primary rule of exclusive taxation of pensions in the country of residence of the beneficiary.
Primary purpose clause
The new version of the treaty introduces a provision conditioning the granting of any deductions or exemptions. The intention is to prevent attempts to use the treaty for tax avoidance purposes. Thus, if obtaining a tax advantage was one of the main purposes of the structure or transaction in question, while at the same time not being in line with the objectives of the treaty, a deduction or exemption would not be granted.
The issue of tax evasion or avoidance is also included in the new preamble to the treaty.
No change in the double taxation avoidance methods
The updated version of the treaty retains the existing methods of avoiding double taxation.