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The United States and Poland have signed a new income tax treaty replacing the 1974 income tax treaty, which was one of the few remaining U.S. income tax treaties that did not contain a Limitation on Benefits (LOB) Article and accommodated international investment. As expected, the new treaty, signed on February 13,2013, includes a modern LOB Article. Unlike other recent treaties, the new U.S.Poland treaty does not eliminate source-state taxation on intercompany dividends, certain types of interest, or royalties.
For withholding provisions, the treaty will be effective the first day of the second month following the date that the treaty enters into force. For all other taxes, the treaty will be effective for tax periods beginning on or after the first day of January of the next tax year following the date that the treaty enters into force. The treaty will enter into force on the date that Poland and the United States have notified each other that they have complied with their applicable internal procedures.
The treaty does not include a transition rule. Therefore, taxpayers presently entitled to treaty benefits may lose them once the treaty takes effect.
Source-state taxation on dividends. Unlike other recent U.S. income tax treaties, the new treaty does not exempt parent-subsidiary dividends from source-state taxation. Similar to the 1974 treaty, source-state taxation is limited to 5% if the beneficial owner of the dividend is a company that owns directly at least 10% of the voting stock of the company paying the dividend and 15% in all other cases. An exemption applies to dividends if the beneficial owner is a pension fund that is a resident of the other contracting state and the dividends are not derived from the pension fund (or through an associated enterprise) carrying on a trade or business.
Source-state taxation of dividends paid by regulated investment companies (RICs) is limited to 15% but may be exempt if the above requirements relating to pension funds are satisfied. With respect to real estate investment trusts (REITs), the source-state taxation of dividends generally is limited to 15% if ( 1 ) the beneficial owner of the dividend is an individual or pension fund, in either case holding an interest of not more than 10% in the REIT; (2)...