Interest on cross-border loans will in principle be taxed on income tax in the lender's country of residence, while taxation will also occur in the source country i.e. in the country of residence of the borrower, however, usually at a reduced rate resulting from the relevant double taxation agreement (UPO). The lender will therefore, in principle, also pay a tax in the country of the source, with the borrower acting as a tax payer.
Interest exemption under the CIT Act implementing EU legislation
First,, before analysing a given UPO contract, you should look at Article 21(3) the CIT Act, which includes income tax exemption on income from, inter alia, interest where the following cumulative conditions are met:
- 1) the payment of interest is a company which is a taxable person of income tax established or managed on the territory of Poland;
- 2) the income from interest is a company which is subject to tax in the European Economic Area on all its income, irrespective of where it is achieved;
3) Company:
(a) the paying agent shall have no less than 25% shares in the capital of the receiving company, or
(b) the recipient has, directly, not less than 25% shares in the capital of the paying company;
- the beneficial owner is the company receiving the interest.
In addition, the exemption in question Under section 3, apply if the company obtaining interest income does not benefit from the exemption from taxation on income tax on all of its income, regardless of the source of their attainment in the country of residence.