Natural persons having their domicile in Poland are liable to taxation of all their income (revenue) regardless of the location of its sources. This rule also applies to income (revenue) earned abroad. In order to avoid its double taxation, the Personal Income Tax Act of 26 July 1991 (i.e. Official Journal of 2021, item 1128, as amended), hereinafter referred to as the Act, as well as double taxation conventions provide for two methods of avoiding double taxation: the proportional deduction method and the method of exemption with progression. Unfortunately, the method of proportional deduction is less favourable for the taxpayer. To reduce its negative effects, the legislator has introduced a special relief, called the abolition relief.
1. What is the abolition relief?
The abolition relief is governed in Article 27g of the Act. It results from the provision that the taxpayer settling income obtained outside the territory the Republic of Poland on a proportional credit basis can deduct from income tax the amount constituting the difference between the tax calculated using the proportional deduction method and the tax deducted using the method of exemption with progression. Therefore, the abolition relief serves to reduce the tax calculated with the proportional deduction method. In order to understand what it is, it’s necessary to specify briefly each method of avoiding double taxation.
2. Proportional deduction method
The proportional deduction method is based on two assumptions. Firstly, all income earned by the taxpayer – both in Poland and abroad – is subject to taxation in Poland. Secondly, the tax paid abroad is regarded as a tax deposit in Poland.
When applying the described method of avoiding double taxation, the taxpayer should add up the income obtained abroad with the income earned in Poland, and then determine the tax on the the total income. An amount equal to the tax paid abroad is deducted from the amount of tax fixed in this way. However, this deduction can’t exceed the part of the tax calculated before making the deduction, which proportionally falls on income earned in a foreign country (Article 27(9) of the Act).
The described method of avoiding double taxation applies when the double taxation convention doesn’t stipulate otherwise. Its use is provided for in double taxation conventions that Poland has concluded, among others, with Belgium, Denmark, New Zealand. It also concerns foreign income obtained in a country with which Poland hasn’t concluded a double taxation convention (Article 27(9a) of the Act).
3. Method of exemption with progression
The method of exemption with progression is caracterised by non-taxation in Poland of income earned abroad. However, this income is taken into account when determining the interest rate of tax.
In order to calculate the tax, the taxpayer should add up the income earned in Poland and abroad. The obtained amount constitutes the basis for determining the interest rate of tax. However, it applies only to income earned in Poland (Article 27(8) of the Act).
The method of exemption with progression is provided for in double taxation conventions that Poland has concluded, among others, with France, Germany, Italy.
4. Mechanism of action of the abolition relief
The method of exemption with progression is more favourable to the taxpayer than the proportional deduction method. The tax calculated using the first method is lower than the tax calculated with the second one. This has also been noticed by the legislator. Therefore, an abolition relief was introduced into the Act.
The mechanism of action of the relief results from Article 27g(1) and (2) of the Act. The taxpayer may deduct from the tax calculated with the proportional deduction method the amount constituting the difference between the tax calculated using the proportional deduction method and method of exemption with progression. However, this deduction can’t exceed the amount of PLN 1,360. The restriction in question isn’t absolute. The limit on deduction doesn’t apply to income earned outside the territory of Poland from the following sources:
- from a business relationship, employment relationship, home based work or cooperative employment relationship,
- from the performance of services, on the basis of a contract of mandate or a contract of specific work, in the event that the income was obtained from: an individual conducting an economic activity, a legal person and its organisational unit, as well as an organisational unit without legal personality,
- from business management contracts, management contracts or contracts of a similar nature, including revenues from such contracts concluded within the context of the taxpayer’s non-agricultural economic activity.
– insofar as this income is received from work or services performed outside the land territory of the States.
The notion “outside the land territory of the States” was specified by the Ministry of Finance in the tax explanations of 10 August 2021 that concern the abolition relief referred to in Article 27g of the Personal Income Tax Act. It was indicated that: “The term “land territory of the States” isn’t defined in the provisions of the PIT Act. Article 6 of the Act on the State Border Protection 8 stipulates that Poland exercises its sovereignty over the land territory and the interior of the earth located below it, internal sea waters and the territorial sea, the bottom and interior of the earth located below them, as well as in the airspace above the land territory, internal sea waters and the territorial sea. According to the cited provision, there are located outside the land territory of the States:
- the categories enumerated in this provision and included in the territory of the States other that the land territory, therefore: the interior of the earth located below the land territory of the States, internal sea waters and the territorial sea, the bottom and interior of the earth located below them, as well as the airspace above the land territory, internal sea waters and the territorial sea, and also
- areas that don’t constitute the territory of States, including areas under the limited jurisdiction of States.
In connection with the foregoing, taxpayers who earn foreign income outside the land territory of the States, as part of certain professions, such as seafarers, flight attendants or pilots, are entitled to settle their income taking into account the abolition relief in the full amount (without applying the introduced limit).”
5. Who can benefit from the abolition relief?
The abolition relief may only be used by a taxpayer with unlimited tax liability in Poland. This is a natural person whose place of residence is located in the territory of this country. According to Article 3(a) of the Act, a person having his/her domicile in the territory of the Republic of Poland is an individual who:
- has a centre of personal or economic interests (centre of vital interests) in Poland or
- stays in the territory of Poland for more than 183 days in a tax year.
The quoted provision defines the so-called tax residence, i.e. a kind of “tax citizenship”.
The above leads to the conclusion that only a natural person with tax residence in Poland can benefit from the abolition relief. An individual without Polish tax residence can’t take advantage of it.
6. Income whose taxation allows to apply the abolition relief
According to Article 27g(1) of the Act, the abolition relief applies in the event of the taxation of income earned abroad from the following sources:
- from a business relationship, employment relationship, home based work or cooperative employment relationship,
- from an activity performed in person,
- from a non-agricultural economic activity,
- from property rights in the field of copyright and related rights within the meaning of specific provisions, from artistic, literary, scientific, educational and journalistic activities performed outside the territory of the Republic of Poland, with the exception of income (revenue) obtained from the use or disposal of these rights.
The abolition relief also applies by analogy to income which principles of taxation provided for in Article 30c of the Act (Article 27g(4) of the Act) concern.
7. Income whose taxation doesn’t allow to apply the abolition relief
The abolition relief can’t be applied to income earned in the countries and terriories listed in the regulation of Ministry of Finance of 28 March 2019 on the determination of countries and territories applying harmful tax competition in relation to the personal income tax (OJ 2019, item 599). These are so-called tax havens. These include, among others: Hong Kong, the Republic of Maldives, the Principality of Monaco, the Republic of Panama, the Republic of Seychelles.
The relief can’t also be applied to income obtained in a country with which Poland hasn’t concluded a double taxation convention and in which the tax hasn’t been paid.
8. Abolition relief in the tax return
The abolition relief is applied in the annual account. Therefore, it should be indicated on the appropriate form. It’s the PIT/O Appendix – Information on deductions from income (revenue) and from tax. It’s constitutes an appendix to the following declarations: PIT-28, PIT-28S, PIT-36, PIT-36S, PIT-36L, PIT-36LS and PIT-37.
Information on the amount of the abolition relief shall be included in Part C of the PIT/O Appendix.
9. Legal notice
The study is a work within the meaning of the Act of 4 February 1994 on Copyright and Related Rights (OJ 2006, No. 90, item 631, consolidated text, as amended). Publishing or reproducing this study or its part, quoting opinions, as well as disseminating in any other way the information contained therein without the written consent of Crede sp. z o.o. is prohibited.
