MLI Convention

As of January 2022, the provisions of the MLI (The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting) Convention entered into force in relation to the agreements concluded between Poland, Chile, Pakistan, Estonia, Croatia, Hungary, Greece and Spain.

What does this mean in practice?

The main modification is the change of the method of avoiding double taxation from the exemption method with progression to the method of proportional credit (so-called tax credit). This method is less favourable for taxpayers. In practice, from 2022 it will cover income earned by Polish tax residents from sources in Jordan, Pakistan and Greece, and from 2023 from Estonia and Spain.

The exclusion method (which has been used until now) is that foreign income is not taxed in Poland. However, it is taken into account when calculating the so-called effective tax rate, which is used to calculate tax on Polish income. The effective tax rate is determined by adding together foreign and Polish income and determining what percentage of the income would be taxed if all income were taxed in Poland ,in practical terms, where between 12% (lower rate) and 32% (higher rate) will be the tax rate.

This also means that if the taxpayer does not earn income from Polish sources, such income is not taxed in Poland.

The tax credit method involves calculating Polish tax on the total income and tax paid abroad, but only up to the amount of tax due on that income in Poland. This means that a taxpayer who receives income taxed at a lower tax rate (in amount) will have to pay additional tax in Poland, up to the amount that would be due on the whole income in Poland.

In practice, this also results in the taxpayer having to pay advance payments on such income in Poland, and may be exempt from such payments on the basis of a decision of the tax office if they demonstrate that their foreign income will be taxed at a higher rate than in Poland.

The entry into force of the MLI Convention also affects income from dividends and the sale of shares in real estate companies (companies of which at least 50% of the assets are real estate located in its country of domicile).

The agreement introduces a requirement to hold shares for at least 365 days in order to apply the profit exemption. Poland does not apply this condition to contracts that already have such a condition (but usually for a longer period).

The convention triggers taxation in the country of residence of the real estate company of the proceeds from the disposal of its shares by a foreign tax resident.