The Polish Council of Ministers has recently published a list of legislative works that includes, among others, changes in the PIT Act and liquidation of the so-called tax abolition relief with effect as of January 1, 2021. These amendments, if they come into force, will result in significant increase in taxation for the Polish tax residents who obtain income outside Poland.
What is the tax abolition relief?
According to general rules, Polish tax residents, who earn income for work performed abroad, settle foreign income in Poland on the basis of one of the following methods of avoiding double taxation:
- exemption of foreign income from taxation in Poland, while foreign income is taken into account to determine so-called effective tax rate applicable to income taxable in Poland; foreign income is not being taxed again in Poland (exemption with progression method) and
- taxation of foreign income in Poland with possibility of deducting foreign tax from the Polish tax determined on total income (the tax credit method, commonly regarded as an unfavorable method of avoiding double taxation).
The tax abolition relief, introduced several years ago, was aimed at equalizing the tax situation of taxpayers earning income in the countries from the above-mentioned an unfavorable method of tax avoidance (tax credit), with the situation of taxpayers who earn income in countries with a favorable method of exemption with progression. Currently, taxpayers who obtain income from an employment relationship, activities performed personally, non-agricultural business activities, and copyrights and related rights (with certain exemptions) can take advantage of the above tax relief.
Effects of liquidation of the tax abolition relief
As a result of Poland’s accession to the MLI Convention, more and more agreements on the avoidance of double taxation concluded by Poland provide for the use of the tax credit method instead of the progressive exemption.
If the income for work is obtained in a country with which the agreement provides for the application of the tax credit method (e.g. the UK, the Netherlands, Ireland) or there is no agreement on the avoidance of double taxation, from the moment of liquidation of the tax abolition relief:
- income obtained for work in these countries will be taxable in Poland, and
- the taxpayer will be obliged to pay the difference between the tax calculated in Poland and the amount of the tax paid abroad.
The changes will not apply to people who obtain income from work in countries with a favorable method of exemption with progression.