Albert Einstein once said that a question pertaining to taxes is too difficult for a mathematician. It should be asked of a philosopher. Unfortunately, the world famous physicist did not take into account that practicing philosophy with reference to this field of law can very easily lead to the omission of a very important principle of constitutional rank. Namely, that the imposition of taxes is by means of statute. Meanwhile, unfortunately, when an opportunity to enrich the budget appears on the horizon, the Polish tax authorities relatively often forget about the aforesaid principle.

The authorities are of the opinion that foreign investors must tax in Poland capital gains from the disposal of stocks in Polish listed companies. Also when there is a double tax treaty in force between Poland and the state in which the transferor has a place of residence for tax purposes. Fortunately, this position is not prevalent and seems to evolve in the direction of more pro tributario practice.

Rules concerning foreign shareholders

Foreign shareholders of Polish joint-stock companies admitted to the public trading in Poland as part of a regulated exchange market must face certain tax consequences once they decide to sell their stocks. Their tax situation depends on whether there is a double tax treaty with the state in which they reside for tax purposes, or not.

If such treaty has not been concluded, the transferor of stocks will have to pay capital gains tax in Poland being 19 percent of income, i.e. generally a sale price less expenses incurred to take up the stocks. Polish tax regulations clearly indicate that natural persons, if they do not have their place of residence in Poland, are liable to pay tax only on income earned in Poland which include among others income from the disposal of securities (stocks in listed companies are treated as securities in Poland) admitted to public trading in Poland as part of the regulated stock exchange market.

… when there is a double tax treaty

The situation changes in the case of a shareholder whose place of residence is the state with which Poland has entered into a double tax treaty. In such case Polish provisions apply taking into account the treaty.

In principle, treaties to which Poland is a party allow taxation of capital gains on the disposal of stocks only in the state in which the transferor has a place of residence for tax purposes. In other words, if a shareholder, who lives on a daily basis for example in Italy, sells stocks in a Polish listed company, then their gain, if any, may be taxed only in Italy, although whether it will actually be taxed depends on Italian domestic tax regulations. The exception are treaties providing for the so-called property clause, according to which gains from the disposal of stocks in a company whose assets consist of at least 50 percent of immovable property located in Poland will also be taxed in Poland – of course, with the application of appropriate methods for the avoidance of double taxation.

What is the tax authorities’ stand?

It would seem that the above principles do not raise any doubts. Unfortunately, this is just a theory. In practice, the Polish tax authorities have attempted to create a rule according to which if the disposal of stocks takes place on the regulated stock exchange market in Poland, then a foreign investor will have to tax their gains on it in Poland, at the same time bypassing provisions of double tax treaties to which Poland is a party.

Fortunately, the position of the authorities is evolving in the direction favorable to foreign investors. More recent tax ruling give to double tax treaties legitimate priority over Polish statutory law. It has ceased to be controversial that gains from the disposal of stocks in Polish listed companies by an investor who resides abroad for tax purposes, when there is a respective double tax treaty in force, is not taxable in Poland and may only be taxable in the state where a transferor resides for tax purposes.

The evolution of the tax authorities’ stand must, of course, be positively assessed. It is a pity, though, that such evolution had to take place at all. When analyzing tax rulings that are negative to foreign investors it is impossible not to get the impression that the authorities have forgotten the fundamental principle of legal certainty. Arguments therein presented are in fact contra legem and in clear a contradiction with the literal wording of Polish tax regulations.

By Tomasz Piejak & Wojciech Jaranowski