Removal of the tax sparing clause (so called fictional tax inclusion)
In the currently valid legal status the above mentioned clause allowed to deduct from the Polish tax, the tax which was paid in the territory of Cyprus, even if it was not factually paid. This was allowed by the used in the double taxation convention expression payable – that is the tax which is subject to be paid and not the one really paid. The removal of the clause causes that liable to deduction from the tax calculated in the territory of Poland from the incomes obtained from dividends, interests and license dues will only be the tax factually paid in the territory of Cyprus.
However, we must remember the provisions of the Directive of the EEC Council nr 90/435/EEC of 23 July 1990 on common tax system with reference to companies – parent and subsidiaries from different member countries modified by the provisions of the EEC Council’s Directive 2003/123/WF of 22 December 2003 changing the Directive 90/435/EWG concerning common taxation system applied in case of parent companies and subsidiaries of various member countries.
In accordance with art. 20 par. 3 of the law on corporate income tax constituting the implementation of the above mentioned Directive, incomes that are exempt from tax are the ones obtained by the taxpayers stipulated in art. 3 par. 1, from dividends and other incomes from the participation in profits of legal persons having the seat or the board outside the territory of Poland, if all the following conditions are fulfilled:
- the payer of the dividend and other incomes coming from the participation in the profits of legal persons is a company subject to taxation in other than Poland member country of the European Union or another country which belongs to the European Economic Area with the income tax on all of its incomes, regardless the place where they are obtained;
- obtaining profits (incomes) from dividends and other incomes from participation in the profits of legal persons, stipulated in point 1, is the company being the payer of the income tax, having the seat or the board in the territory of Poland;
- the company mentioned in point 2 possesses directly not less than 10% shares in its capital, which is stipulated in point 1;
- the company, stipulated in point 2 is not exempt from the income tax on the whole of its incomes, regardless what their source is;
- the total amount of deduction cannot exceed this part of the tax, which was calculated before the deduction was made and which proportionally constitutes the income obtained from this source.
Thus incomes obtained by the taxpayers of the corporate income tax fulfilling the above mentioned conditions will be exempt from the corporate income tax.
Entrepreneurs who intend to establish a holding company in the territory of The Republic of Cyprus should take into account that in the period from 1 January 2012 to 30 September 2013 the so called defence contribution clause is in use for the dividend paid for the Cypriot residents. This clause assumes that the payment of dividend by a foreign company in favour of a Cypriot company is subject to taxation in Cyprus with the 20% income tax rate unless the Cypriot company possesses at least 1% of shares in the initial capital of the foreign company. The exempt will not be applicable however, if all the following conditions will not be fulfilled:
- the income of the company that pays the dividend is in more than 50% a passive income, i.e. the income coming from passive dues; and
- the foreign income tax calculated on the income from dividend is lower than 5%.