Update on changes to the tax treaty between the Netherlands and Poland

On 29 October 2020, the Netherlands and Poland signed a protocol amending the tax treaty between the Netherlands and Poland (Protocol). The articles of the Protocol are generally in line with the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (Multilateral Instrument or MLI).
 
Please find below a summary on the relevant articles of the Protocol and our recommendations in this respect.
 
Dual resident entities
The tax residency of companies will be determined by way of a mutual agreement procedure (MAP) between the tax authorities of the Netherlands and Poland (instead of the current allocation method based on the place of effective management). In absence of any mutual agreement a company will in principle not be entitled to any tax relief or exemption provided by the tax treaty.
 
Prevention treaty abuse (principle purpose test)
The application of the tax treaty between the Netherlands and Poland will depend on observing a new anti-abuse provision, the so-called principle purpose test (PPT).
The PPT is worded as follows:
 
“Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention.”
 
Capital gains of real estate rich companies
Allocation of taxing rights to the state of source with respect to capital gains derived from the alienation of shares (or other rights of participation) in an entity which derives 75% or more of its value from immovable property situated in a jurisdiction at any time during 365 days preceding the alienation. An exception applies to recognized pension funds.
 
Avoidance of permanent establishment clauses
The Protocol includes certain articles which are amongst others aimed at combatting the artificial avoidance of permanent establishment status.
 
Classification of liquidation proceeds and income from purchase of own shares
Under the application of the Protocol, liquidation proceeds and income from purchase of own shares are treated as income from shares to which the dividend article applies. Levy rights on such income is partially allocated to the source state.
 
Mutual agreement procedure
The Netherlands and Poland will be required to set-up a MAP which in includes an option for binding arbitration if the MAP is unresolved after two years. Tax payers have the option to present their cases to either competent authorities within three years from the first notification of the action resulting in taxation that is not in line with the tax treaty between the Netherlands and Poland.
 
Entry into force
The Protocol will most likely enter into force on 1 January 2022. The Protocol will then apply to tax years, periods and taxable events taking place on or after this day.
 
Recommendation
Due to the introduction of the PPT, MAP and capital gains clause for real estate rich companies in the tax treaty between the Netherlands and Poland, discussions may (inter alia) arise on entitlement to the benefits of the tax treaty, the tax residency of Dutch and Polish companies and a different allocation of levy rights for real estate rich companies.
 
We recommend assessing whether your structure meets the current and future requirements of the tax treaty between the Netherlands and Poland and verifying this with Polish tax counsel. Obviously, we would also be pleased to share our comments and answer your questions on the upcoming changes to the application of the tax treaty between the Netherlands and Poland.