Participation Exemption

COUNCIL DIRECTIVE 2011/96/EU of 30 November
2011 on the common system of taxation applicable
in the case of parent companies and subsidiaries
of different Member States

The 1990 Directive was designed to eliminate tax
obstacles in the area of profit distributions between
groups of companies in the EU by:
 abolishing withholding taxes on payments of

dividends between associated companies of
different Member States and

 preventing double taxation of parent companies on

the profits of their subsidiaries.

Participation Exemption

The updated

list

of companies that the Directive

covers also includes:

• the European Company (

Council Regulation (EC)

2157/2001

and

Council Directive 2001/86/EC

)

which may be created from 2004; and

• the European Co-operative Society (

Council

Regulation (EC) 1435/2003

and

Council Directive

2003/72/EC

) which may be created from 2006

Participation Exemption

The minimum shareholding was/is:

 25% before 2005
 20% from 1 January 2005 to 31 December 2006
 15% from 1 January 2007 to 31 December 2008

and

 10% from 1 January 2009

Company in Poland

„A” Company

Art. 10 OECD Model Treaty

Dividends may also be taxed in the source state, but
the tax charged shall not exceed:

•

5% of the gross amount of the dividends if the

beneficial owner is a company which holds directly at
least 25% of the capital of the company;

•

15% in all other cases

What does Beneficial Owner mean?
A person who enjoys the benefits of ownership even
though title is in another name.

Participation Exemption

For companies with unlimited tax liability in a EU Member
State or another European Economic Area (EEA) Member
State (or Switzerland), an exemption from the withholding
tax on dividends paid out by Polish companies is provided
(participation exemption). The foreign shareholder should
hold directly minimum 10% of shares in the Polish company
over the uninterrupted period of at least 2 years.

Example

A Sp. z o.o. is a legal entity incorporated under the Polish law.
The shareholders of A are:

-

a German LLC with 25% shares,

-

a British natural person with 20% shares,

-

a German partnership with 55% shares, in which a Duch LLC

holds 95% interests.

What are the tax consequences in the case of paying out
dividends?

Participation in the foreign entity

PE

Corporation

Poland

Profit: 1000

Profit: 1000

Tax: 25 % => 250

Tax: 25 % => 250

WHT: 15 % => 112,5

tax credit: 15 % => 112,5

tax liability => 30

After tax: 607,50

Foreign profits tax
exempted

effective taxation: 25 %

Effective taxation: 39,25 %

1. PE

2. Corporation

PIT: 19% => 142,5

Examples

What are the tax consequences when A

Sp. z o.o. holds 10% of shares in the EU
company over the uninterrupted period of
2 years?

Participation Exemption

Since a subsidiary company is taxed on the profits out
of which it pays dividends, the Member State of the
parent company had either:
• exempt profits distributed by the subsidiary from

any taxation or

• impute the tax already paid in the Member State of

the subsidiary against its own tax.

Member States must impute against the tax payable by the
parent company any tax on profits paid by successive
subsidiaries downstream of the direct subsidiary. This ensures
that the objective of eliminating double taxation is better
achieved.

Exemption

In case of dividends received from EU, EEA Member States and
Switzerland tax provisions could provide for two abolishing
methods:

1.

participation exemption is applied if the parent
company has held at least 10% capital participation
in the foreign subsidiary for an uninterrupted period
of at least 2 years.

2.

underlying tax credit: The tax actually paid by a
subsidiary on the part of its profits from which a
dividend was paid can be credited

– up to some

limit - against income tax payable by the parent
company.

Partnership in Poland

Partnership

„Company” means any corporation or any entity that is treated as a

body corporate for tax purposes.

„Enterprise of a Contracting State” means an enterprise carried on

by a resident of a Contracting State

Tax Treaty Issues Regarding Partnerships

Is the partnership entitled to the benefits of the tax treaty?

• The tax treaty is applicable to persons who are residents of

one or both of the Contracting States.

• When the partnership as such can be considered to be

resident of a Contracting State, it may enjoy the benefits of
the relevant tax treaty.

• To be considered a resident in a Contracting State, the

partnership should be liable to tax in that State by reason of
its domicile, residence, place of management or any other
criterion of a similar nature

Model of Taxation

transparent

intransparent

Austria, Denmark, Finland, Germany, Norway, Sweden

Bulgaria, Croatia, Estonia, Spain, Portugal, Russia,

Romania, Lithuania, Ukraine, Hungary

France (transparent if no liability limitation), Italy, Switzerland
(national transparent, foreign intransparent)

, USA (check-the-

box), Czech Republic (unlimited partner transparent, limited
partner intransparent)

mixed

Tax Treaty Issues Regarding Partnerships

Conflicts of qualification result from the different
treatment of partnerships in the domestic laws of the
two states.

Due to such differences the income of an
„international” partnership could be taxed twice or no
taxation can take place.

Transparent Partnerships under Polish Tax Law

• In Poland a partnership is not subject to income (corporate) tax as it is

a “transparent” flow-through entity. The partnership’s income is
allocated to the individual partners and is taxed on each partner’s
level.

• However, a foreign partnership maintains its tax status in accordance

with the tax law of another state, provided it is treated as a legal
person and is taxed on its total income in another state.

• Foreign partners in a Polish partnership will be subject to limited

income tax liability if the business income is realized through a PE in
Poland. For treaty purposes it is assumed that every partner in a
partnership through his participation in the partnership has a PE in
each country where the partnership has a PE.