Deduction of foreign tax in the PIT return for 2024

Persons who earn income from abroad – for example, from interest or dividends – must declare this tax themselves in their annual PIT return.

It often happens that tax has already been deducted at source from such payments abroad. The amount depends on the country of payment. In practice, the tax paid abroad is often higher than the tax that would be payable in Poland.

In such a situation, is it no longer necessary to pay tax in Poland?

Unfortunately, the matter is not that simple. The provisions of individual double taxation agreements (DTAs) and divergent case law of tax authorities and administrative courts come into play.

What do the regulations say?

According to the PIT Act, income from interest and dividends, regardless of the country of origin, is taxed at a rate of 19%.

In cases where this tax has not been collected by a Polish payer and paid to the Polish tax office, the taxpayer must independently declare the PIT payable on this account.

However, the regulations allow taxpayers to deduct, among other things, an amount equal to the tax paid abroad from foreign interest and dividends. This deduction cannot exceed 19%, i.e. the amount of tax in Poland.

Position of the tax authorities

In individual interpretations issued on the deductibility of withholding tax collected on foreign interest and dividends, the Director of the National Tax Information Service (KIS) recognises that deductions can only be made up to the amount of tax resulting from the relevant UPO.

Consequently, a taxpayer receiving dividend and interest income, e.g. from Switzerland, on which withholding tax of 35% was levied, could, in accordance with the position of the Director of the National Tax Information Service, deduct a maximum of:

• 15% for dividends and
• 5% for interest.

Therefore, despite the 35% withholding tax, the taxpayer would still be required to pay an additional 4% tax on dividends and 14% on interest in Poland.

What do the administrative courts say about this?

The administrative courts consistently disagree with the above position. They consider that the provisions of the PIT Act in this respect do not refer in any way to the rates under the UPO and that there are no grounds for further limiting the 19% limit specified in that provision.

Further actions of the taxpayer

Despite the favourable court rulings, the tax authorities still claim that the deduction cannot exceed the rates resulting from the UPO.

This was recently confirmed to us by the Director of the National Tax Information Service, who, in response to our question, indicated that:

‘The amount equal to the tax paid abroad (up to the tax rate provided for in the double taxation agreement) is deducted from the flat-rate tax due on this income. If the taxpayer has not submitted a certificate of residence to the foreign payer and the foreign payer has collected more tax than is provided for in the double taxation agreement (UPO), then the tax is deductible up to the amount resulting from that agreement.’

In practice, therefore, the taxpayer has two options:

• deduct the entire tax paid abroad (up to 19%), in accordance with the case law of administrative courts, and be prepared for a dispute with the tax authorities,

or

• adopt the approach of the Director of the National Tax Information Service, pay the missing tax in Poland and, if necessary, apply for a refund of the overpayment abroad.

Making a decision in this regard may require an analysis of several factors, such as: the amount of tax to be paid, the procedure for recovering withholding tax abroad, the time-consuming nature of contacts with foreign institutions or tax authorities of other countries, as well as obtaining additional documents from the Polish tax authority (e.g. a tax residence certificate). Our experience shows that it is worth taking action both before receiving interest or dividend income and after paying higher tax abroad.