For many years, optimisation-focused Polish tax residents have been opting for the tax-neutral practice of distributing profit and transferring capital back to Poland through foreign companies as directors’ fees.
These schemes gained such popularity and were followed at such a scale that they triggered the revision of Double Taxation Treaties. The Polish government first negotiated amendments to the Double Taxation Treaty between the Republic of Poland and the Republic of Cyprus (these entered into force on 1 January 2013), and then renegotiated its Double Taxation Treaty with the United Arab Emirates (amended version in force since 1 January 2016).
Recently, the schemes based on directors’ fees under the Malta-Poland Double Taxation Treaty won some popularity.
These schemes, however, emerged only because some investment advisers and law offices who provide international tax planning services have misinterpreted the possible implications of such “optimisation” efforts and remain unaware of the actual tax impact. As this mechanism is based on a misguided differentiation between the taxation of directors’ fees and the taxation under employment contracts, customers heeding the advice of such law offices run the risk of Malta's tax authorities instigating proceedings to recover the income tax due.
Many taxpayers who apply this scheme wrongly seek comfort in the numerous positive interpretations issued by Polish tax authorities on tax-exempt directors’ fees paid out by Maltese companies. Little do they know that though Poland exempts directors’ fees awarded for being a member of a body corporate from taxation, Malta does not. Furthermore, Malta exempts fees disbursed for services other than being a member of a body corporate from tax, but Poland classes them as income under employment contracts and, as such, subject to taxation.
Currently, only one scheme where directors’ fees are used to channel profit and capital back to Poland ensures optimal tax effect: that based on the provisions of the Convention made on 26 July 1999 in Beirut between the Republic of Poland and the Lebanese Republic for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital (“Convention”).
After examining the Convention and the local tax regulations of both Contracting States, it becomes apparent that the same directors’ fees may be exempt from both withholding tax and taxation in Poland on condition that a company registered in the Lebanese Republic has an appropriate legal form and provided that the Polish tax resident is a duly authorised and appointed member of that company’s management body.
Pursuant to the provisions of Article 16 of the Convention: “Directors’ fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State”.
It is set forth in point (a) of the Convention’s Article 24 (which Article contains provisions on methods for elimination of double taxation) that Poland shall eliminate double taxation as follows:
“Where a resident of Poland derives income or owns capital which, in accordance with the provisions of this Convention, may be taxed in Lebanon, Poland shall (...) exempt such income or capital from tax”.
In the next sentence of the same point, it is stipulated that the amount of tax on the remaining income of a Polish taxpayer shall be calculated based on the principle of tax exemption with progression, i.e. any income derived in this manner will increase the tax base of other income derived by the taxpayer in Poland, and if this is the taxpayer’s only income, the taxpayer will not even have to submit any Annual Tax Return.
The Lebanese company SAL offshore can help put this scheme in practice. Though the word “offshore” forms part of its name, this company is subject to lump-sum income tax of approx. USD 650 per annum on all income, irrespective of where it is derived. In other words, this company meets the definition set forth in Article 4 (which provides the definition of “Resident”) and further Convention provisions may be applied in the wake of this definition.
Fees of directors appointed as members of SAL offshore's body corporate are exempt from tax in Lebanon.
The closed list of the company’s objects cannot exceed 10 (ten) categories, including management of companies based and operating in countries other than Lebanon (e.g. Cypriot companies).
When selecting this tax optimisation scheme for profit disbursement and transferring capital back to Poland, particular attention ought to be paid to the fact that as at the date of drafting this article only 56 individual interpretations on the Lebanese Republic were available on the website of the Polish Ministry of Finance (as compared to 2,455 for Cyprus and 742 for Malta), with 32 out of all the Lebanon-focused interpretations being centred on tax exemption of directors’ fees (and all the 32 confirmed the above reasoning).
The scarcity of individual interpretations gives grounds for the belief that it is still long before the Polish Ministry of Finance recognises optimisation through Lebanese companies as an issue significant enough to spark Convention renegotiation. Thus, there is ample time for planning and ensuring the stability of schemes incorporating Lebanese SAL offshore companies.
Michał Pluta
Legal Consultant
KAIMAKLIOTIS & CO LLC