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Malta’s tax treaty with Poland amended

Deloitte Malta Tax Alert

12 May 2021

In terms of the Double Taxation Relief on Taxes on Income with the Republic of Poland (Amendment) Order, 2021 (Legal Notice 64 of 2021) (the ‘Protocol’), Malta has effectively implemented the revisions to the Convention between the Government of Malta and the Government of the Republic of Poland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes and capital signed on 24 November 1994 (the ‘Malta-Poland Treaty’), as contemplated in an agreement reached between Malta and Poland on 30 November 2020.

Below is a summary of the key changes introduced by the Protocol:

Article 10 - Dividends

The definition of the term ‘Dividends’ was amended to also include income from distributions on certificates or participating units of an investment fund and their redemption, the liquidation or partial liquidation of a company and income from the purchase or redemption of own shares by a company.

Article 11 - Interest

By virtue of the Protocol, the rate at which Poland shall be allowed to tax interest arising in Poland and paid to a resident of Malta (being the beneficial owner thereof) has been reduced from up to a maximum of 5% to 4% of the gross amount of the interest.

Article 12 – Royalties

Before the coming into force of the Protocol, article 12 of the Malta-Poland Treaty solely catered for ‘royalties’.

By virtue of the Protocol, article 12 was amended to also include payments for technical services in addition to royalties. Due to such addition, Poland may also tax payments for technical services arising in Poland and paid to a resident of Malta (being the beneficial owner thereof), provided that the tax so charged in Poland shall not exceed 5% of the gross amount of the payments for technical services.

Consequently, a new definition of the term ‘payments for technical services’ was introduced in article 12 to cover any payment in consideration for any service of a managerial or consultancy nature, unless the payment:

(i) is made to an employee of the person making the payment;

(ii) is made for teaching in an educational institution or for teaching by an educational institution;

(iii) is made by an individual for services for the personal use of an individual;

(iv) is made for services related to immovable property located in the Contracting State of which the person making the payment is a resident, if such services resulted in a construction, maintenance project, or a landscaping project or a similar tangible project; or

(v) is accrued under the laws of a Contracting State to the initial value of the machinery or industrial equipment of the person making the payment or to the maintenance of such machinery or industrial equipment.

Article 13 – Capital Gains

Before the coming into force of the Protocol, the Malta-Poland Treaty provided that gains derived by a resident of a Contracting State from the alienation of shares deriving more than fifty per cent (50%) of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in the other Contracting State.

By virtue of the Protocol, this taxing right was broadened to cover gains derived by a resident of a Contracting State from the alienation of shares or comparable interests, such as interests in a partnership or trust, or certificates or participating units of an investment fund if at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than fifty per cent (50%) of their value directly or indirectly from immovable property situated in the other Contracting State.

Article 16 – Directors’ Fees

Prior to the coming into force of the Protocol, the Malta-Poland Treaty provided that Directors’ fees and similar payments derived by a resident of one of the Contracting States in his capacity as a member of the board of directors, or other comparable body however described, of a company which is a resident of the other Contracting State may be taxed in that other Contracting State.

By virtue of the Protocol, Directors’ fees and other similar payments derived by a resident of a Contracting State in the capacity as a member of the board of directors or of the supervisory board or of any other similar organ or a company which is a resident of the other Contracting State shall be taxed only in that first-mentioned State.

Article 23 – Elimination of Double Taxation

By virtue of the Protocol, where a resident of Poland derives income which may be taxed in Malta in accordance with the provisions of the Malta-Poland Treaty (except to the extent that the provisions of the Malta-Poland Treaty allow taxation by Malta solely because the income is also income derived by a resident of Malta), double taxation in Poland shall be avoided by means of a deduction from the tax on income equivalent to the amount of tax paid in Malta. Such amount shall not exceed that part of the income tax, as computed before the deduction is given, which is attributable to the income which may be taxed in Malta.

Article 25 – Mutual Agreement Procedure

The Protocol amended the article relating to the mutual agreement procedure provided in the Malta-Poland Treaty by adding a new requirement that provides that the objection in question should appear to be satisfied in order for the competent authority to endeavour (if it is not itself able to arrive at a satisfactory solution) to resolve the case by mutual agreement with the competent authority of the other Contracting State.

In addition, the following part has been added to article 25:

  • Where a person has presented a case to the competent authority of a Contracting State on the basis that the actions of one or both of the Contracting States have resulted for that person in taxation not in accordance with the provisions of the Malta-Poland Treaty and the competent authorities are unable to reach an agreement to resolve that case within three years from the presentation of the case to the competent authority of the other Contracting State, any such unresolved issues shall be submitted to arbitration if the person so requests in writing, unless a decision on such issues has already been rendered by a court or administrative tribunal of either State.
  • Unless a person directly affected by the case does not accept the mutual agreement that implements the arbitration decision, that decision shall be binding on both Contracting States and shall be implemented notwithstanding any time limits in the domestic laws of these States. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this paragraph.
  • The competent authorities of the Contracting States may agree to resolve the case within two years.

Article 26 – Exchange of Information

A further addition was made in relation to exchange of information whereby a Contracting State may use information received for other purposes when such information may be used for such other purposes under the laws of both States and the competent authority of the supplying State authorizes such use.

Article 26A – Prevention of Treaty Abuse

The Protocol introduced a principal purpose test applicable to all benefits under the Malta-Poland Treaty, which states that, notwithstanding any provisions of the Malta-Poland Treaty, a benefit under this Agreement 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 purposes of the relevant provisions of this Agreement.

Coming into force

This Protocol shall enter into force on the thirtieth day after the receipt of the of the notifications to be issued by the each contracting state to the other, in writing and by means of diplomatic channels, in relation to the completion of the procedures required by its law for the bringing into force of this Protocol and shall thereupon have effect:

(a) in respect of taxes withheld at source, to income derived on or after the first day of January of the year next following the date on which the Protocol enters into force;

(b) in respect of other taxes on income, for taxes chargeable for any tax year beginning on or after the first day of January of the year next following the date on which the Protocol enters into force.

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