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Dominika Tyczka

Tax adviser (Poland)
Associate Partner
Phone: +48 71 733 97 92
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Convention MLI

The Multilateral Instrument to Modify Bilateral Tax Treaties, or MLI for short, entered into force on 1 July 2018 to implement the BEPS (Base Erosion and Profit Shifting) provisions aimed at counteracting aggressive tax planning on international scale. This starts the process of amendments to double tax treaties signed between Poland and certain countries. The MLI has been signed by 78 jurisdictions so far and five have already ratified it: Poland, Austria, Slovenia, Isle of Man and Jersey. A transition period will last until the end of 2018 and the MLI will come into full force on 1 January 2019.

DTAAs to be affected by the MLI

Note that the MLI does not automatically amend the respective double taxation avoidance agreements but instead is used in parallel to the signed and notified agreements. Whenever the provisions collide, the MLI prevails. The MLI may affect the tax obligations of Polish enterprises operating abroad and of foreign enterprises operating in Poland. Basically, the MLI is to modify the provisions of respective bilateral double taxation avoidance agreements (DTAA). However, for this to happen, both parties to the relevant agreement must first ratify the MLI and make a notification of their DTAA that they wish to be covered by the MLI (i.e. to designate them as Covered Tax Agreements).  . Poland has expressed interest in having 78 DTAAs covered by the MLI. 

The MLI in Poland

 In the first place, starting from 1 January 2019, changes will affect Poland's DTAAs concluded with the other four jurisdictions that have ratified the MLI, namely Austria, Isle of Man, Jersey and Slovenia. The MLI will be gradually extended to apply to more DTAAs as it is ratified by other countries. Poland has not yet reported the DTAA with Germany to be covered by the MLI. The USA has not ratified the MLI at all so it will not apply to the DTAA with that country

7 key points of the MLI

The MLI provisions are meant to counteract aggressive tax planning and aim at identifying the actual place where a company creates added value. The 7 MLI key points are as follows:

1. Dividend Transfer Transactions

A provision that dividends may be exempt or excluded from taxation, provided that you hold shares, stocks, voting rights or similar rights in the dividend payer for a minimum period (365 days).

Poland has reserved the exclusion of this MLI provision to the extent that the DTAAs indicated by Poland already include the provision on the minimum holding period (this is the case for the DTAAs signed with e.g. Belgium, Cyprus, Denmark, Malta).

2. Immovable property clause

This clause regulates the sale of shares or interests in entities whose assets consist principally of immovable property. The MLI introduces a certain period (365 days) that must precede the sale of shares and extends the definition of capital gains from shares to include the capital gains from other comparable rights of participation in an entity.

Poland has declared its intention to apply the relevant MLI provisions on condition that all parties to the notified DTAAs also choose to apply them to the same DTAA provisions. 

3. Switch-over clause 

This clause replaces the exemption with progression method with the proportional deduction method. In the exemption with progression method the income earned abroad is tax-exempt and affects only the tax rate applicable to the income earned in Poland. In the proportional deduction method, foreign income is taxable in Poland and double taxation is avoided by the right to deduct the tax paid abroad; however, such deduction may not exceed that part of the tax which is attributable to such items of income or capital which may be taxed abroad. 

Using the latter method usually implies higher taxation, but through the so-called amnesty tax relief under the Polish CIT Act the difference resulting from the application of the two aforementioned methods is deducted from tax. In practice, this will result in the obligation to file an annual tax return disclosing the foreign income earned by Polish tax residents working abroad, but such an obligation will not increase the tax burdens on individuals.

The MLI provides for three options (A, B or C) that can be used to introduce this clause into the DTAAs. Poland has chosen option C. According to this option, the method currently applied cannot be automatically replaced with the proportional deduction method. The application on the proportional deduction method will depend on the approach of the other contracting state. If the other contracting state does not agree to the application of option C, Poland will not be able to apply it.

4. Restriction on the use of hybrid structures

According to the MLI, where an entity (other than an individual) may be treated under a DTAA as a tax resident of more than one state, the parties to that DTAA must agree in which of the states that entity is resident for DTAA purposes. If the parties come to no agreement, the entity will not be entitled to the benefits arising from the DTAA. The entity's residence should be determined taking into account the place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. 

Poland has notified a list of DTAAs including provisions determining the residence of an entity other than an individual. If the contracting states indicate the same provisions of the notified DTAAs, then by way of the mutual agreement procedure, they will agree on which of them a given entity should be considered a tax resident. The rules of determining the tax residence of individuals remain unchanged.

5. PTT (Principal Purpose Test) clause

By virtue of this clause tax authorities may challenge a transaction (arrangement) with a foreign entity by refusing to grant the benefits under a DTAA in respect of an item of income or capital if they reasonably conclude that the sole purpose of that transaction or arrangement was to obtain a tax benefit.

By signing the MLI, Poland has declared its intention to introduce the new general PPT clause to the DTAAs to which it is a party.

6. Limitation of benefits (LOB) clause

According to this clause, states may make the tax benefits dependent on the fulfilment of additional conditions concerning e.g. legal structure, ownership structure or business structure.

Poland has declared that it will additionally work towards introducing the LOB clause into the individual DTAAs by way of bilateral negotiations.

7. Mutual Agreement Procedure (MAP)

Mutual Agreement Procedure (MAP) obliges the contracting states to make efforts to prevent taxation in breach of the DTAA.

In respect of the DTAAs with Indonesia, Qatar, Kuwait, Lebanon and Italy, Poland has made a reservation that the deadline for reporting taxation not in accordance with the provision of the DTAA will be shorter than the deadline provided for in the MLI, and will be three years.

Minimum standard

Most of the MLI provisions are optional. However, the parties to the MLI are obliged to apply the so-called minimum standard (set out in Articles 6, 7 and 16 MLI) to the notified DTAAs, which includes:

  • the pursuit of the goals of the DTAAs, understood as the avoidance of double taxation and prevention of tax avoidance or tax evasion;
  • applying provisions preventing treaty abuse in order to prevent tax benefits (PTT and LOB clauses);
  • applying dispute settlement provisions (the so-called mutual agreement procedure).

Taxation of foreign permanent establishments according to the MLI

With regard to action 7 BEPS, the purpose of the MLI is also to prevent artificial avoidance of permanent establishments. The MLI:

  • ntroduces anti-abuse rules that deal with the allocation of profits to permanent establishments in third jurisdictions (Article 10);
  • extends the definition of a dependent agent (Article 12); 
  • prevents artificial splitting-up of business transactions (Article 13); 

prevents artificial splitting-up of contracts so as not to reach the time limit after which a permanent establishment is deemed to be created for construction or installation work (Article 14); Article 15 MLI also introduces the definition of “a person closely related to an enterprise”. 

Poland has reserved the right not to apply the MLI's provisions on permanent establishments – those issues will be agreed in bilateral negotiations over respective DTAAs.  

The MLI will greatly affect international businesses. We recommend regular monitoring of the changes to DTAAs and reviewing your tax accounts in view of the amended DTAAs. In the first place, we recommend looking at your transactions with Austria, Isle of Man, Jersey and Slovenia. 

If you have any questions or doubts about the requirements in the wake of Polish ratification of the MLI, Rödl & Partner's experts in Cracow, Gdansk, Gliwice, Warsaw and Wroclaw will be happy to help you.

23.07.2018