Where does double taxation come from?
The problem of double taxation affects Polish tax residents who earn income at home and abroad simultaneously. This is because they are required to pay tax on their income in accordance with unlimited tax liability, i.e. pay taxes in Poland. These taxpayers are subject to another rule: the principle of source taxation, under which they must also pay income tax abroad. It is this situation that creates double taxation – if left that way, the taxpayer would pay two income taxes, and there would be little left over from the money earned.
Fortunately, there are ways to nullify double taxation. Let’s get to know them!
Methods of avoiding double taxation
Although “tax avoidance” sounds like shenanigans, everything – fortunately – is done in accordance with the rules, and is actually just a mechanism to restore proper (i.e. single) taxation for those earning income abroad.
Poland has signed international treaties guaranteeing taxpayers to limit the negative effects of double taxation with as many as ninety countries, so that doing business in them does not result in the imposition of double tax. However, it is not so simple that the agreement abolishes the problem and you no longer need to worry about it. Learn about two methods to minimize double taxation.
Method of exclusion with progression
This method of accounting involves taxing only the income that the taxpayer earns in the country of tax residence. However, the amount of income earned abroad is used to determine the rate of income tax that the taxpayer must pay.
The process is as follows:
- First, the sum of income earned at home and abroad in terms of the currency of the country of tax residence is calculated.
- Income tax is then calculated according to the general rules (tax scale)
- The next step is to determine the tax rate in Poland. To do this, the amount obtained in the second point is divided by the sum of income (point 1), and then multiplied times 100%. The result obtained is the tax rate.
- The final step is to calculate the tax due – remember that it is calculated only on income earned in the country.
EXAMPLE
Ms. Maria works simultaneously in Poland and Sweden – in the country she earns an income of PLN 62,000 a year, while in Sweden she earns PLN 110,000 a year. In both cases, he earns based on an employment contract. Its income tax according to the process described above will be calculated as follows:
- 62,000 + 110,000 PLN = 172,000 PLN (total income).
- 85,528 PLN * 17% = 14,539.76 PLN
86,472 PLN * 32% = 27,671.04 PLN
PLN 14,539.76 + PLN 27,671.04 = PLN 42,210.8 (income tax)
- 42,210.8 PLN / 172,000 PLN * 100% = 24.54% (tax rate)
- 62,000 * 24.54% = PLN 15,214.8 (tax due)
The method of exclusion with progression in this case allowed Ms. Maria to save a lot of money in Poland, but this does not mean that she will not pay any tax in Sweden. However, she will be able to take advantage of the abatement relief, which we will discuss later
Proportionate deduction method
This method is used when a taxpayer earns income abroad, but the treaty between the Republic of Poland and the country where the taxpayer earns income does not contain a provision for the application of the method of exclusion with progression, or the double taxation treaty has not been concluded between the two countries at all. The provisions governing this issue can be found in the Personal Income Tax Law. The law on double taxation speaks specifically in Art. 27 i 28.
To calculate the amount of tax payable under this option, one must add up the income earned at home and abroad, and then deduct the amount of income tax the taxpayer paid abroad. However, the amount deducted cannot exceed the portion of income that has been taxed abroad.
We must use the proportional deduction method in the Netherlands, for example. So if Ms. Maria worked under exactly the same conditions in the Netherlands, her situation would change and the tax to be paid would be greater.
EXAMPLE
Assuming that the sum of income remains constant: PLN 172,000 per year, the income tax will be PLN 42,210.8.
It is now necessary to relate the resulting amount to the ratio of foreign to total income. We perform a simple calculation for this purpose: PLN 42,210.8 * (110,000 / 172,000). The result of this equation is the amount of PLN 26,995.27.
If the advance income tax that Ms. Maria has already paid in the Netherlands was PLN 14,000, this means that she can only deduct the difference.
To do this, she subtracts the amount of the advance payment she has already made (PLN 14,000) from her income tax (PLN 42,210.8). As a result, PLN 28,210.8 will remain to be paid.
Double taxation vs. abatement relief
An important element for taxpayers in avoiding double taxation is the abatement relief. Its provisions allowed for a long time to significantly reduce the amount of tax due to be paid in a situation where Poland did not have a signed agreement with the country in which the taxpayer earned income, or where the taxpayer had to apply a less favorable method of proportional deduction for other reasons.
Unfortunately, as of the beginning of 2021, there have been quite a few changes in the abatement relief, which are worth taking into account when calculating income tax. To round out your knowledge of double taxation, check out what’s changed by reading our guide: 2022 abatement relief!
