Doube Trouble

Nobody likes to pay tax least of all, it seems, those in the best position to do so, whether they be individuals or corporations. Of course, part of the problem is the insatiable demands of governments to spend – and indeed, alas, to waste – other folk’s money. If the government is not being reasonable, why should the tax payer? What we need is a simple flat rate tax system where every tax is at the same rate and everybody pays the same percentage. Much fairer and easier to sell along the lines of: “work one day a week for the state and four days for your family or shareholders”. But I digress – back to double trouble.

In Poland the corporate income tax rate is a relatively benign 19 per cent as is the rate of income tax paid by the self employed – employees are taxed at a basic rate of 18 per cent and then a higher rate of 32 per cent (Chancellor of the Exchequer please note). However, just as investors seek to improve their tax position by holding shares in a Polish through a corporate holding structure in a lower tax regime, such as Cyprus, individuals have also been able to use a Cyprus company effectively to avoid paying tax on income at all.

Under the treaty between Poland and Cyprus on the avoidance of double taxation, income received by a Polish resident by way of fees for being a director of a Cyprus company fall to be taxed in Cyprus. As long as a director is not resident in Cyprus, the tax authorities apply a rate of zero per cent to such fees. This combined with Cyprus’s rules on allowable corporate expenses has meant that Polish resident director of a Cyprus company could receive up to 90 per cent of the income of that company effectively free of tax.

Too good to be true? No, surprisingly, but most sensible professionals advise against such a blatant approach and considered 50 per cent to be a more appropriate rate on the grounds that any more was almost inviting the tax man to fight back. Some of us also said that this could not last. And, indeed, it won’t.

On 22nd March, the Polish Ministry of Finance has announced, a protocol was signed in Nicosia to amend the double tax treaty. Amongst other changes is the provision that the income of a director will be taxed in the country of residence of that director and procedures for exchanging information about the income of Polish residents in relations with Cyprus, including funds held in bank accounts. The changes to the treaty still have to be ratified and so it is not clear exactly when the changes will come into force but it is now only a matter of time. Double trouble looms for those unprepared for the changes.

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