- For withholding tax—from the first day of the second month following the entry-into-force date
- For other tax provisions—from 1 January of the calendar year following the date of entry into force
Tax professionals in Luxembourg anticipate that the Protocol will enter into force in 2012, with application of the provisions to be measured from 1 January 2013.
Under the Protocol, the withholding tax rate on:
- Dividends is reduced to 0% (from 5% under existing treaty provisions) when the beneficial owner is a company (other than a partnership) of the other treaty-partner country holding directly at least 10% of the capital of the paying company (previously a stake of 25% of the voting shares was required) for an uninterrupted period of at least 24 months preceding the date of the dividend payment.
- Interest and royalty payments is reduced to 5% (instead of 10% as under the existing treaty) when the beneficial owner is resident in the other treaty-partner country.
Under the Protocol, capital gains realized on disposal of shares in a company deriving more than 50% of its value (directly or indirectly) from immovable property situated in the other treaty-partner country may be taxed in the country where the immovable property is located.
Capital gains derived by Luxembourg companies from the disposal of the shares of Polish companies with real estate property in Poland are to be taxable in Poland under the new treaty.
With the new rules on capital gains taxation, some taxpayer may find it to be preferable to establish a double-tier Luxembourg structure, under which a Luxembourg company would sell the shares of the Luxembourg company holding the Polish real estate company (instead of selling the Polish real estate company), subject to proper review of implications under Polish domestic tax law.
Luxembourg and Poland will continue to apply the exemption method with a reserve of progression.
- Luxembourg will apply the credit method for income covered by Articles 10 (Dividends), 11 (Interest), 12 (Royalties), 13 (4) (Capital gains derived from real estate company shares) and 17 (Remuneration of artists and sportsmen).
- Poland also will apply the credit method to these articles (except Article 17), and to Article 7 (Business income), Article 13 (All types of capital gains) and Article 14 (Remuneration of independent professions).
As a result, the exemption currently applicable to dividends paid by a Luxembourg company to Polish residents (including individuals) will be eliminated.
The clause related to exemption of dividends paid by a Polish company to a Luxembourg resident company is also removed.
Nevertheless, the exemption of dividends and capital gains derived from shares (even shares in a property owning company) provided by Luxembourg domestic tax law are to continue to apply.
Exchange of information
The Protocol contains an exchange of information clause in accordance with OECD standards. The Protocol however specifies that the country requesting the information must provide the other country with specific information to demonstrate that the requested information is relevant for its own procedure.
Limitation on benefits
The Protocol introduces a limitation on benefits (LOB) clause disallowing the application of the treaty to income paid or received in relation to artificial arrangements or in situations considered as harmful tax competition, as defined under the EU Code of Conduct group in charge of business taxation.
Read this June 2012 report [PDF 54 KB] prepared by the KPMG member firm in Luxembourg.