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HMRC internal manual

Double Taxation Relief Manual

Poland: Interest and Royalties

To determine the rate of tax chargeable in Poland on interest and royalties, it is necessary to look at the agreement and the effect upon both of the EC Directive on Interest and Royalties (2003/49EC) (see INTM400010 to INTM400110).

The EC Directive on Interest and Royalties provides for the abolition of source state taxation on interest and royalty payments made between associated companies in different Member States. It also ensures that the payments are subject to tax once in a Member State.

However, Poland has obtained a derogation and will be allowed to defer full implementation of the Directive and carry on deducting withholding taxes until the expiry of an eight year period commencing 1 July 2005. The specified withholding rates allowed are 10 per cent for the first four year period and 5 per cent for the second four year period.

Under the agreement, there is no blanket exemption for interest. Interest is exempt from Polish tax if it paid in respect of loans made or guaranteed by the United Kingdom government, if it is paid in connection with the sale on credit of equipment or if it is paid to a bank. Apart from the exemptions, the new agreement provides for a source state tax rate of 5% on interest.

So, in the circumstances when the EC Directive applies, Poland will be entitled to tax at 5 per cent on interest, until 1 January 2013, when the EC Directive will provide exemption.

Under the agreement, royalties payable from Poland may be taxed at a rate of 5 per cent. In circumstances when the EC Directive applies, Poland’s entitlement to tax at 5 per cent on royalties will cease on 1 January 2013, when such royalty payments will be exempt.