Polish Tax Treatment Of Foreign Financial Institutions 'Discriminatory'

by Ulrika Lomas, Tax-News.com, Brussels

15 May 2009

The European Commission has sent a reasoned opinion to Poland with regard to its legislation providing for higher taxation of interest and dividends paid to foreign pension funds and investment funds and higher taxation of interest paid to foreign financial institutions.

The Commission’s case against Poland concerns two aspects of Polish direct tax legislation.

Firstly, Poland exempts Polish pension and investment funds from corporation tax. Therefore, all dividends and interest that such domestic funds receive are tax exempt. However, dividends paid from Poland to foreign pension and investment funds are subject to a withholding tax of 19%, unless a tax treaty provides otherwise. Likewise, interest paid from Poland to foreign pension and investment funds is subject to a withholding tax of 20%, unless a tax treaty provides otherwise. The Commission has underlined that Polish tax legislation constitutes a restriction on the free movement of capital (guaranteed by Article 56 of the EC Treaty) and the freedom of establishment (pursuant to Article 43 of the EC Treaty).

Secondly, non-resident financial institutions are subject to Polish withholding tax on the gross amount of the interest received, whereas domestic financial institutions are taxed only on their net profits, i.e. after deduction of related costs such as the interest they pay to their creditors. The Commission is of the opinion that Poland has in this case failed to fulfil its obligations under Article 49 and Article 56 of the EC Treaty, i.e. the freedom to provide services and the free movement of capital.

If there is no satisfactory reaction to the reasoned opinion within two months, the Commission may decide to refer the matter to the Court of Justice of the European Communities.

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