Israel – Poland Tax Treaty

Business activity in Poland

Many Israelis choose to invest in real estate in Poland. Poland’s economy has recently been undergoing significant changes: The increasing flow of refugees from Ukraine, as of today (November 2022) constitutes over 14% of the population of Warsaw. This change has many meanings – it changes the labor market in Poland, increases the demand for renting apartments in Poland, especially in Warsaw, and affects the high inflation in Poland.

The official figure speaks of 17%, but economists believe that the true figure is 21% inflation in 2022. It is important to note that the real estate field has not changed to the same extent due to financing difficulties; Polish banks are reluctant to give mortgages for refugees from Ukraine.

Our office maintains business relationships with many professionals in Poland and is well versed in domestic law and specializes in assisting our clients in business activities in Poland, including setting up a company; opening a bank account; carrying out tax planning; making contact with local businesses and providing legal advice. We continuously work with accounting and law firms in Warsaw for the purpose of assisting our clients.

Photo: In July 2023, Nimrod Yaron met as part of the European conference of the International Fiscal Association with senior officials of the Polish government: Dr. Yaakov Jankowski, Deputy Director of the Tax Office in Poland responsible for corporate tax in Poland, Ms. Bata Krabovnik, Deputy Director of the Income Tax Division at the Ministry of Finance in Poland and Dr. Philip Meidowski, who is responsible for the assets of the government companies in Poland. At the meeting, the participants discussed the challenges of international taxation.

Business activity in Poland considering the pandemic (Corona) crisis

Despite the corona crisis, the state of business activity in Poland is relatively good. During 2020, the European Union supported Poland with an injection of over 15 billion zlotys (3.4 billion euros), and private investors injected another 6.1 billion zlotys. Real estate prices have not changed due to the corona virus.

Several agreements were signed between Israel and Poland:

1. Investment encouragement and protection agreement
2. Convention for the Prevention of Double Taxation

Investment encouragement and protection agreement

In May 1992, the stated above agreement between Israel and Poland became effective, with the purpose to protect the activity of investors against non-commercial risks and to encourage mutual investment.

To read the agreement click here.

Treaty for the Prevention of Double Taxation between Israel and Poland

A treaty for the prevention of double taxation is a bilateral agreement, in the framework of which two countries determine the taxation rules that will apply to income and assets that have an affinity to both countries. In addition, the treaties include principles for the exchange of information on tax issues between the countries.

To read more about tax treaties in Israel and around the world, click here

The tax treaty between Israel and Poland was signed in 1991 and entered into force on January 1, 1992.

The full Double Tax Treaty between Israel and Poland can be found here.

Applicability of the MLI

The MLI is an automatic mechanism for amending bilateral tax treaties, which will only apply when both countries sign the multilateral treaty and confirm its application in their domestic law. Both Israel and Poland signed the Multilateral Treaty (MLI) in 2017. Poland ratified the treaty in July 2018, and Israel ratified it in January 2019. This means that the treaty between Israel and Poland changed automatically according to the content of the MLI treaty, subject to the reservations set by both countries.

The list of clauses in the MLI treaty that will apply due to the ratification of the agreement by Israel and Poland and will affect the bilateral treaty:

• Section 3 – Transparent entities.
• Section 4 – Dual residency for anyone who is not single.
• Section 5 – Implementation of methods to prevent double taxation (option C).
• Section 6 – The purpose.
• Section 7 – Prevention of abuse of the treaty.
• Section 8 – Dividend transfer transactions.
• Section 9 – Capital gains from the transfer of shares of entities whose main equity is derived from real estate.
• Section 17 – Mandatory adjustments.

Residency for tax purposes

 Residence of an individual

An Israeli citizen will be considered a resident of Poland if he stayed in Poland for more than 183 days during the relevant fiscal year. In that case he will be liable to tax according to Polish law. In addition, an Israeli citizen will be considered a resident of Poland according to the affinity test – if his economic or family ties are in Poland.

To learn about how an individual is considered a resident of Israel read here.

Residency of a company

A company will be considered a resident of Poland for tax purposes, when its actual management center is in Poland, or if it was incorporated and registered in Poland.

To learn about how a company is considered a resident of Israel read here.

Poland’s tax regime

The Tax Authority of Poland is called US, and it is based in Warsaw at the address Świętokrzyska 12, 00-916 Warszawa.

Individual income tax: the preparation tax is progressive, and the tax ceiling is 32%.

Income tax for companies and branches: 19%. A company considered resident in Poland will be liable to tax on all its income from the world. On the other hand, companies that are not residents of Poland will be liable to tax only for income generated in Poland.

According to new regulations of the Tax Authority in Poland, companies must have a minimum profit of 1% of the turnover. A company that reports a lower profit than this will pay 10% out of 4% of its total accounting turnover, i.e., 0.4% of the turnover.

The regulations were approved in 2022 but a postponement was granted, and they will enter into force in the tax year 2023. Our office accompanies companies in preparation for this change in legislation and assists in tax planning in this context.

VAT: 5%-23% (normally 23% except for exceptions).

Capital gains tax: 19%.

Withholding tax

Inheritance/estate tax in Poland

Those who do not hold Polish citizenship (foreign resident) will not be required to pay gift and inheritance tax on movable property and property rights in Poland if the testator/giver of the gift is not a resident/citizen of Poland.

The inheritance tax sets different tax rates depending on the value of the gift/inheritance and the proximity of the heir/receiver of the gift to the testator/giver.

• Group 1- first degree family:
• up to PLN 10,278- 3%.
• From 10,278 PLN to 20,556 PLN – 308.30 PLN and another 5% on the value beyond 10,278 PLN.
• Above PLN 20,556 – 822.20 PLN and another 7% on the value beyond PLN 20,556.

• Group 2 – second degree family:
• up to 10,278 P PLN – 7%.
• From PLN 10,278 to PLN 20,556 – PLN 719.50 plus 9% on the value.
• Above 20,556 – 12% on the value.

• Group 3 – friends, acquaintances, and strangers (those who are not first or second-degree family):
• up to PLN 10,278 – 12%.
• From 10,278 PLM to 20,556 PLN – 1,233.40 PLN plus 16% on the value.
• Above 20,556 PLN – 2,977.0 PLN and another 20% on the value.

Transfer prices

The legislation in Israel regarding transfer prices appears in Section 85A of the Tax Ordinance (new version), 1961-5771 and the Income Tax Regulations (Determination of Market Conditions) – 2006 (Regulations).

On January 1, 2022, changes to regulations related to transfer pricing in Poland came into effect. The changes apply to transactions that will be carried out in tax years after December 31, 2021. As part of the amendments, the deadline for submitting transfer pricing documentation to the tax authorities has been extended from one to two weeks, but the tax authority will retain the authority to request that the obligee prepare and submit a local file within 30 days for specified controlled transactions for which the debtor was exempt from the documentation requirement because he used the financial safe harbor mechanism. In addition, taxpayers are now required to prepare and submit domestic files electronically.

Transfer prices in Poland are regulated by domestic legislation.

Our office has carried out many transfer pricing works involving companies in Poland. For information on transfer prices in Poland, click here.

Relocation

According to the treaty for the prevention of double taxation, when a company is considered a resident of two countries according to the internal law of each of the countries, that is, a resident of Israel according to Israeli law, and also a resident of Poland according to Polish law, it will be considered a resident of the taxable country according to the place where the actual management of the company is carried out.

Hence, companies controlled by an individual who relocated from Israel to Poland may be considered Polish residents, and therefore liable to pay tax. Therefore, it is crucial to consult with experts in the field, and our firm provides advice in this field as well.

Further information on relocation can be found on our Relocation article.

Real estate taxation in Poland

The tax rate that must be paid on profit from the sale of real estate by an individual is 19%. If it is a company, corporate tax will be paid for the profit at the normal rate (19%/9%).

The buyer of the real estate is required to pay a “transaction tax” of 2% of the transaction price, unless the transaction is subject to VAT on real estate transactions, in which case it will be exempt from this tax. As a rule, the VAT applicable to real estate transactions is 23%, except for apartments Residences, on which the tax is only 8%.

To learn about exemption from real estate taxation, see the Investment Incentives in Poland chapter in this article.

The taxation considerations on real estate transactions that must be taken into account before making transactions are complex, and it is important to understand the laws, and professional information on the subject. Our office offers consulting services in the field.

Business activity between Israel and Poland

The volume of trade between Israel and Poland in 2021 increased by 22% compared to 2020 and stands at approximately 1,329 million dollars. This figure shows a 22% increase in the volume of trade compared to 2020. In addition, there was an 11% increase in the export of goods and services and a 25% increase in the import of goods and services.

Our office specializes in providing legal advice and support to our clients in Poland. Our many connections with accountants and lawyers help clients by establishing businesses, opening bank accounts, and connecting Poland to Israeli companies.

Transfer of funds

Transfer of funds from Israel to Poland

According to Section 170(a) of the Income Tax Ordinance, most transfers of funds from Israel to Poland will require prior approval from the Tax Authority.

In providing advice regarding the transfer of money abroad, in addition to the issue of withholding tax, our office handles the requirements of the foreign banks, such as an accountant’s approval regarding the payment of taxes and examines additional actions required considering the uniform standard of CRS between the countries – automatic exchange of information between countries which is carried out first through the banks and then between the tax authorities of each country.

Non-bank loans in Poland are subject to a transfer tax of 2% except for exceptions. One should pay attention to this issue when determining the structure of activities involving companies in Poland.

The banks raise many difficulties and charge high fees for converting the shekels into zlotys, so it is important to consult before transferring the funds. Contact us.

Types of business entities in Poland

The common types of companies in Poland are:

1. limited liability company is the most common form of association in Poland. For its establishment, a minimum share capital of 5,000 PLN (Polish zlotys) is required, with each share having a minimum value of 50 PLN. The meaning of limited liability is that the liability of the shareholders is limited to the funds they invested in the purchase of the shares, and they cannot be charged beyond that. A limited liability company must pay income tax and VAT in Poland.

2. The Polish joint-stock company refers to large businesses. Its establishment requires a minimum share capital of PLN 100,000 and the par value of one share cannot be lower than PLN 0.01. Foreign investors who want to expand their business in Poland can open a branch or a subsidiary in Poland.

3. A civil law partnership is a good business option for small businesses. This is a simple business form that requires two partners to declare joint business goals. Each partner is responsible for the partnership’s obligations.
4. The general partnership is also intended for relatively small businesses managed by at least two entities and does not require a minimum share capital. The partners are responsible for the partnership obligations. The partnership must be registered in the national court register, otherwise it cannot carry out any business activity.

5. The limited partnership does not require a minimum share capital, but it must have at least two founders. The partners are responsible for the partnership obligations.

6. A limited stock partnership should include an active partner (the general partner) and a passive partner or shareholder (the capital provider). Its establishment requires a minimum share capital of PLN 50,000, with a minimum share value of PLN 0.01. The general partner bears unlimited liability for the partnership’s obligations up to the full value of all assets. The shareholder has no responsibility for the partnership’s obligations.

Investment incentives in Poland

1. Government grants – Government grants are given based on the program to support investments of importance to the Polish economy for the years 2011-2030. As part of the program, the support will be given for the creation of new jobs, and the amount of the grants can be increased if training programs are offered to the workers at the workplace. The support is given based on the number of jobs added, investment costs and more.

For more information about the program on the website of the Polish Investment and Trade Agency, click here.

2. Industrial and technology parks – The benefits apply to both Polish and foreign businesses. For more information about the program on the website of the Polish Investment and Trade Agency, click here.

3. Patents – Already since 2009, Poland has offered extensive support to investors carrying out research and development activities: R&D tax breaks, government R&D grants, as well as several programs co-financed with EU funds. In addition, there is a preferential tax rate of 5% (instead of 19%) on income from intellectual property rights.

For more information about the program on the website of the Polish Investment and Trade Agency, click here.

4. Exemption from real estate tax – The council is entitled to grant an exemption from real estate tax to businesses as a form of assistance from the state. It is important to submit the application for exemption on time because it is not possible to see all the investment expenses incurred before the exemption as costs eligible for exemption.

For more information about the program on the website of the Polish Investment and Trade Agency, click here.

Due to the great importance of submitting the right documents at the right time, and to the right place, our office offers consulting and support services to businesses and individuals operating in Poland. Contact us, and we will be happy to arrange an introductory meeting with you.

Countries with which Poland has signed a treaty to prevent double taxation: