Not benefiting from a tax exemption on a worldwide income: Remarks in the light of interpretation as effective taxation requirement

Abstract

The preamble to Directive no. 2011/96/EU and the preamble to Directive no. 2003/49/EC indicate that the aim of these acts is to avoid double taxation of dividends, interest and royalties within the European Union by, among other things, exempting such payments from withholding tax. However – in order to apply the withholding tax exemption – the company paying such receivables and the company receiving these receivables have to meet certain subjective conditions. One of these conditions requires that the payment recipient cannot benefit from tax exemption on its worldwide income, regardless of its source. The interpretation of the indicated condition raises doubts in the practice of tax authorities and administrative courts. In particular, there is no consistent standpoint on whether the said condition is met only if a given entity benefits from subjective exemption or a 0% tax rate on all of its income, or whether it is also met if a given entity is not subject – regardless of the basis – to effective taxation in the country of residence. The article aims to determine the semantic scope of the indicated condition in light of standpoints presented by the doctrine of Polish and international tax law, the Court of Justice of the European Union, administrative courts, and tax authorities. It can be argued that the analysed condition does not exclude eligibility to apply withholding tax exemption if the received payment is not subject to effective taxation in the recipient’s country due to, among other things, objective exemptions or methods of determining the tax base.