A way to double taxation
Poles who work abroad are, in a sense, at a crossroads between the tax laws of the country where they earn and those of their place of residence. Until a few years ago, Poland provided these individuals with a favorable method of avoiding double taxation.
However, the situation has changed over time, as Poland signed the MLI Convention in 2019, committing to change to a method of accounting less favorable to taxpayers. In return, the Finance Ministry promised Poles working abroad that the abolition relief in effect since 2008 would in practice avoid the negative effects of ratifying the convention.
Before we go further, let’s answer two questions: what are double taxation avoidance methods and what is the abatement relief?
Methods of avoiding double taxation
Double taxation is an undesirable situation in which a taxpayer must pay income tax on one income twice. This applies to people who have a residential address in Poland, but at the same time perform work abroad. The Republic of Poland has signed agreements with a number of countries that were intended to help avoid double taxation. Depending on the country, two methods are used:
- method of exclusion with progression;
- proportional deduction method.
Important!
If no agreement has been signed between Poland and the country where the taxpayer performs work, the latter method is used.
Method of exclusion with progression
Under this method, one country (which is party to the relevant treaty) gives up its tax claim on income earned by the taxpayer in the other country.
The taxpayer must add up the income earned at home and abroad, which gives him the amount of total income. It then calculates tax on the total according to the tax scale. The next step is to calculate the interest rate. For this purpose, the formula is used:
The result applies only to income earned in Poland and indicates the amount of income tax to be paid.
EXAMPLE
Mr. Jędrzej, who works in France, earns an income of PLN 60,000 there, while in Poland he earns an income of PLN 12,000. The 17% of the PLN 72,000 amount is PLN 12,240. Mr. Jedrzej must now deduct the tax-reducing amount – PLN 525.12. It received a result of PLN 11,714.88. The interest rate (according to the formula above) in this case is 16.27%. The last step to be taken is to multiply the amount of income earned in Poland by the interest rate – the amount of tax to be paid is PLN 1,952.40.
Proportionate deduction method
Under this method, all income (not just that earned in Poland) is taxed, but the amount of tax already paid abroad can be deducted. However, there is a limit up to which income can be deducted.
EXAMPLE
What if Mr. Jedrzej had earned the same income in the Netherlands instead of in France? To begin with, he should combine the income earned and calculate income tax from it. Let’s use a simple calculation: (72,000 * 17%) – 525.12 = PLN 11,714.88. The resulting amount is multiplied times the ratio of income earned abroad to total income: 11,714.88 * (60,000 / 72,000) = PLN 9,762.40. This is the amount the taxpayer could deduct. Mr. Jedrzej’s Dutch employer withheld advance income tax in the amount of PLN 7,500. Since the taxpayer has paid an amount abroad that is less than the limit just calculated, he can only deduct the amount up to the amount of tax paid. The final amount of tax to be paid is therefore 11,714.88 – 7,500 = PLN 4,214.88.
Abolition relief – what is it?
Important!
The main function of the abatement allowance is to equalize the amount of taxes payable regardless of whether the employee earns income in a country where the exclusion method or the proportional deduction method is applied.
The abolition relief applies to those who work in a country with which Poland has signed an agreement assuming the use of the proportional deduction method – but this is not the only condition. The relief is available to taxpayers who earn income abroad from specific sources, as indicated in the PIT Law (Articles 12(1), 13 and 14), as well as from copyright and related property rights.
Until now, the abatement relief could be applied regardless of income. Unfortunately, this state of affairs is about to change.
Abolition relief – changes
In September 2020, the Finance Ministry announced another amendment to the PIT Law. The effect of the change, which was passed in the Sejm a month ago, will include. Establishing a limit on the amount of deductions under the abatement relief. What will change in reality? Who will lose out on this and how much?
The amendment provided for in the draft sets the amount of the limit identical to the tax-reducing amount on income not exceeding PLN 8,000. In practice, this means that the taxpayer will be able to deduct a maximum of PLN 1,360. For details, see the PIT Law (Article 27, paragraph 1a, item 1).
A controversial fact is that the abolition relief was eliminated by the Finance Ministry with virtually no warning. The ministry chose to give the following reason:
The abolition relief provides an incentive to undertake economic activity outside the territory of the Republic of Poland, which is often the first stage of the process of permanent relocation of residence abroad […] The new approach requires the gradual elimination of solutions that favor relocation […] outside the country (such as the abolition relief) and the simultaneous creation of mechanisms that encourage people to stay in the country.
All signs indicate that the abolition relief will virtually cease to exist in 2021. Polish residents who work abroad in countries where tax is calculated using the proportional deduction method will lose out: among others. In Belgium, Denmark, the Netherlands, Iceland or the United States.
Important!
The abolition of the abolition relief does not apply to those who reside abroad permanently and have a center of interest there (such as family).
