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The Warsaw Voice » Law » April 7, 2010
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Cypriot Holding Company in Real Estate Projects in Poland
April 7, 2010   
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The Polish building sector has escaped the worst consequences of the global economic crisis, ending the previous year with a rise of the value of production sold. This year this positive tendency should be maintained, and production in the construction sector should rise faster than in any other sector of the Polish economy.
Appropriate tax planning is a key aspect of any investment project, especially in real estate projects. Polish taxpayers investing in real estate projects in Poland may choose from many tax planning methods, among which a Cypriot holding company may be one of the most beneficial. Cyprus has one of the most favorable tax regimes in the European Union with a corporate income tax rate of only 10 percent, developed office services, widespread proficiency in English, a liberal attitude by the tax authorities and a traditionally business-friendly legal system based on British common law.
The advantages of the Cypriot tax system may be exploited for projects in many areas of business including real estate investments on Polish territory. Poland imposes a 19 percent withholding tax on any dividends paid to non-resident companies by companies residing in Poland, unless a lower tax treaty rate applies. The relationship between the Polish subsidiary and the Cypriot parent company holding shares in the Poland-based company is subject to the Parent Subsidiary Directive that has been implemented in Polish tax law. As a result, dividends paid by the Polish real estate companies to Cypriot companies under uncomplicated and easy-to-meet conditions will be exempt from withholding tax in Poland.
In contrast, in Cyprus dividends received by a Cypriot company from a Polish subsidiary will not be subject to any taxation if the Cypriot company holds at least 1 percent of the shares in the subsidiary's share capital and if not more than 50 percent of the Polish subsidiary's income has a passive character, resulting from inter alia interests and dividends. If the latter scenario is not the case, for the tax exemption to still be effective, it is sufficient that the subsidiary is not subject to a tax burden in the territory of its operations which would be substantially lower than the CIT rate in Cyprus. To exempt dividends from taxation, the tax authorities in Cyprus generally accept corporate income tax rate at a level of 7.5 percent which, in the light of the current Polish tax rates, will always be achieved.
The tax structure based on involvement of a Cypriot parent company and a Polish subsidiary may also be a useful tool in limiting tax liability when a real estate project has been completed and is ready to be sold to a potential buyer in order to realize the profit. There are two options that may be contemplated. The first, traditional, one requires a Polish subsidiary to sell the real estate property to the buyer, which will result in the Polish subsidiary's tax liability at a rate of 19 percent. A more interesting situation requires a Cypriot company to sell all shares in the Polish subsidiary that has constructed the real estate project. The price received from the sale of the shares will also, in principle, be subject to 19 percent tax in Poland, but in Poland the tax authorities will not impose any withholding tax, as under the double taxation treaty the right to impose the tax is vested in the Cypriot tax authorities. In Cyprus, this tax will not be levied because in the light of the general tax exemption, the profits from the sale of the shares in the Polish resident company are treated as profits from the sale of securities and are as such exempt from taxation.
The proceeds gained by the Cypriot holding company from the sale of shares may be reinvested with a reduced tax burden or be paid out to a Polish shareholder of the Cypriot company. In the latter case, Cyprus levies no withholding tax on dividend payments effected in favor of foreign shareholders.
The tax structure of any investment project, especially in the real estate sector, involves detailed planning and profound analysis in order to achieve a lower tax burden and eliminate tax risks. The Cyprus tax system is an exceptional venue, allowing the investor to reach these goals and creating the opportunity to reinvest the incomes generated from the project via a network of 45 tax treaties.
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