On 27th November 2017 the Minister of Foreign Affairs published a notice in the Journal of Laws of the Republic of Poland amending the provisions on interest taxation in the Polish text of the double taxation treaty concluded with Sweden (hereinafter: the ‘Treaty’ or ‘DTT’).
The notice aims to correct an error resulting from linguistic inconsistency between Polish and Swedish versions of the Treaty by introducing in Article 11(1) of the DTT the
so-called beneficial ownership clause.
As result, the new wording of the regulation contained in Article 11(1) of the DTT reads as follows: ‘Interest arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in that other State’.
It should be noted that the Treaty has been drafted in three language versions: Polish, Swedish and English. Pursuant to article 30 of the agreement, in case of any divergence of interpretation the English text shall prevail.
According to the information provided by the Minister, the purpose of the notice is to correct ‘the error’ contained in Article 11(1) of the DTT. The English version of the above regulation contains a beneficial ownership clause, whereas the Polish version referred only to a resident in the other Contracting State.
The above inconsistency resulted in controversies among the tax authorities and administrative courts as to whether Polish taxpayers are obliged to analyze the content of an agreement drafted in a foreign language.
The literal wording of the Polish version of the Treaty stated that if interest was paid by a Polish entity to a Swedish resident, such interest should not be subject to withholding
Currently, the tax authorities are initiating and conducting numerous audits and proceedings regarding taxpayers paying interest to Swedish residents in the past years. According to the standpoint presented by the tax authorities the English version of the Treaty should be binding for the Polish taxpayers. As a result, the tax authorities verify the beneficial owner status of the Swedish residents receiving interest and, consequently, the right to benefit from the favorable provision of the DTT (no withholding tax on interest payments).
In view of the above, the current tax authorities' approach can have a significant impact on the tax settlements of companies that relied on financing provided by Swedish residents in the past.
Please do not hesitate to contact us if the aforementioned issue is relevant from your company’s perspective or if you are interested in details of the discussed regulations.