Breakthrough judgment obtained in the case of contributions on foreign income
The Polish Deal introduced new rules for health insurance contributions, which have sparked significant controversy. However, a ruling by the District Court in Krakow, in a case led by MDDP in collaboration with Osborne Clarke, offers a glimmer of hope for entrepreneurs concerned about their finances. The story of one of our clients shows that it is worth fighting for your rights, particularly when ZUS demands health insurance contributions on foreign income that have been wrongly calculated.
The case involved health insurance contributions imposed by ZUS on income from a foreign company that neither had a registered office nor a branch in Poland. This was solely because the taxpayer, as a Polish tax resident, was required to declare this income in their Polish tax return as business income. In addition to running a sole proprietorship in Poland, for which they paid social security contributions to ZUS, the taxpayer received income from a US-based tax-transparent company. As per the applicable regulations, all of this income was declared in the Polish tax return.
After receiving information via tax information exchange regarding the taxpayer’s income (due to the changes brought about by the Polish Deal), ZUS demanded additional health insurance contributions, arguing that foreign income should also be subject to health insurance contributions.
The defense strategy developed by MDDP successfully challenged ZUS’s arguments, and the District Court ruled in favor of our client at the first hearing. The court clearly stated that income from foreign companies should not be subject to health insurance contributions, citing, among other things, that only shareholders of companies listed in the system law are subject to such contributions.
The shortcomings of the Polish Deal provisions have been raised numerous times by Anna Misiak, particularly concerning the imposition of health insurance contributions on income from foreign business activities conducted in legal forms unknown to Polish regulations. The mechanism for declaring foreign business income for PIT purposes does
not even allow the indication that such income is not related to any of the companies under Polish law, yet ZUS, armed with information about the income amount, wrongly imposed health insurance contributions on this income.
Moreover, it is important to note that if the income from foreign business activities were to be declared in Poland using the exemption method with progression, it would not have been subject to ZUS’s procedures, and ZUS would not have issued a decision imposing additional health insurance contributions. This is because the income would not have appeared in the same PIT declaration box as the income from the remaining business activities conducted in Poland under Polish law.
Thus, regardless of the fact that ZUS imposes health insurance contributions on income from tax-transparent foreign companies merely because they must be reported in the PIT for tax purposes, there is an additional differentiation based on whether taxpayers derive income from countries where a tax credit or exemption with progression method is applied. In cases where a taxpayer earns income from a country with which Poland has a favorable double taxation agreement, no proceedings are initiated by ZUS, and health insurance contributions are not imposed.
As more and more Polish tax residents, both Polish citizens and foreign nationals who have moved to Poland, hold stakes in foreign tax-transparent companies, the number of such cases is expected to increase. They declare income from these companies in their PIT after the end of the year in accordance with the provisions of the applicable double taxation treaties. No one anticipated during the drafting of the Polish Deal that, due to the exchange of tax information between tax authorities and ZUS, such income would become subject to additional health insurance contributions—often substantial ones—even if the companies are registered in legal regimes not specifically listed in the system law.
This may very well be the first judgment of its kind in Poland.
The case was handled by Anna Misiak and Rafał Sidorowicz from the Personal Taxes and Employer Advisory Team at MDDP.