Mateusz Morawiecki’s government is planning massive changes in tax law and wants to introduce them already in the third quarter of this year. The Prime Minister has praised the proposed changes calling them “beneficial to taxpayers” and “in line with the government’s financial strategy that emphasizes the development of entrepreneurship”. But it turns out that included in these legislative changes is a trap the Ministry of Finance has set on Poles who are working abroad. To explain it, we need to look at two sentences from the list of legislative work and policies of the Council of Ministers.
These sentences are:
“Regarding the Act on the flat-rate income tax on some revenue earned by natural persons.
7. removal of tax-relief on foreign income (repeal of Article 13a)”.
It’s hard to imagine such phrases would capture the imagination of the broader public, but as it turns out... they certainly should.
The removal of tax-relief on foreign income would mean a very real and tangible problem: some Poles who work abroad would have to start paying their taxes in Poland.
It would concern a specific group of people, the so-called Polish tax residents, i.e., individuals officially residing in Poland who meet one of the following conditions:
- their center of personal or economic interest (center of vital interests) is within the territory of Poland, or
- they reside on the territory of Poland for a duration of time longer than 183 days in a given fiscal year.
Important! Individuals whose residence for tax purposes isn’t in Poland (the so-called “non-residents”) have a limited tax obligation, i.e., they only pay taxes on income earned while on the territory of Poland (e.g. revenue earned from the business activity).
What’s a tax-relief on foreign income?
Tax-relief on foreign income can be seen as a kind of protective shield against Polish tax authorities.
Currently, when a taxpayer who works abroad for several months (whether under an employment contract, freelancing, or having his/her own business) and then comes back to Poland for a short period of time, he/she is exempt from paying an additional tax in Poland thanks to tax-relief on foreign income.
-Tax relief on foreign income was introduced in 2008 in order to equalize the tax burden on people working outside Poland (and still having Polish tax residence) due to differences in the adopted methods of avoiding double taxation- says Małgorzata Trzesimiech, a tax advisor representing Ożóg Tomczykowski law firm (in short: the regulation was intended to account for people whose official residence is in Poland and who spend less than half of the year abroad).
According to the Ministry of Finance, this is about to change now.
All persons working in countries with whom Poland had signed a bilateral agreement on double taxation providing for the so-called proportional deduction method (e.g. the Netherlands, Norway, Singapore, Belgium, USA), will pay higher taxes calculated in accordance with the official Polish tax rates.
Using this method means that the revenue earned abroad will be taxed in Poland, and the taxes paid abroad will be deducted from the tax due.
But people who earn their income in countries with whom Poland did not sign such a bi-lateral agreement (e.g. Liechtenstein, Brazil) will also pay higher taxes.
How many people working abroad will have to pay more?
Ms. Trzesimiech points out that several thousand Poles take advantage of this tax-relief every year. According to the report on “Tax Preferences in Poland” prepared by the Ministry of Finance, in 2015 alone 35.000 people took advantage of the tax relief.
How much more will you have to pay? A lot
Łukasz Boszko, a senior consultant at the Grant Thornton consulting company, notices that repealing the tax-relief will come with serious consequences.
- Without tax-relief on foreign income, the tax burden on people working abroad will undoubtedly increase. However, given different tax rates in different countries, at this point, it is difficult to determine the exact percentage of this increase – says Boszko.
The general principle will be fairly simple: the lower the tax burden in the country of employment, the more tangible the effects of the policy change.
– For instance: given the high tax-free allowance in the Netherlands, Polish tax residents temporarily working in that country currently pay very low or no income tax on the income they have earned there – Łukasz Boszko explains.
He further adds: –Usually, thanks to the existing tax-relief, such income is also exempt from taxation in Poland. Once it is abolished, however, all income (on which no tax was paid in the Netherlands due to the tax-free allowance), even though it was not earned in Poland, would still be subject to taxation in Poland.
Mr. Boszko identifies another potential problem. Poland is currently in the process of amending 78 treaties on avoiding double taxation (we are implementing the Multilateral Instrument to Modify Bilateral Tax Treaties or MLI).
Thus, in some cases, implementing MLI would mean that the method of avoiding double taxation is replaced by a proportional deduction method.
-As a result, the planned tax policy changes could affect a large group of Poles working abroad – Mr. Boszko warns.
However, for more details, we will have to wait until the Ministry reveals the draft bill.
Why does the Ministry of Finance want to remove tax-relief on foreign income?
-At the moment, there is no official explanation as to why the Ministry of Finance decided to do away with the relief after 12 years – says Ms. Trzesimiech.
She points out that already in 2015 the Ministry emphasized the issue of using tax-relief on foreign income in aggressive tax planning.
Thus, repealing the relief would be yet another step of the Ministry of Finance in fighting the problem of double non-taxation of income.
-While the purpose seems to be legitimate, unfortunately, it will also put a heavy financial burden on many Poles who work abroad temporarily – Ms. Trzesimiech concludes.
Mr. Boszko thinks that the legislative changes will incentivize many Polish citizens to permanently move their center of vital interests from Poland to another country. -They will simply emigrate to avoid paying more taxes, which at the end of the year, may amount to a substantial number- he says.
The changes in tax law would concern Polish tax residents.
And if a Polish citizen resides in another country for at least 183 days in a given year, has his/her home and family there, and is linked to Poland only by a passport, he/she no longer needs to pay a personal income tax in Poland and is thus subject only to the law of the new country of residence.
In that case, the person does not have to file a tax return and pay taxes to the Polish tax authorities.
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