Persons going to work in a country other than the one where they have tax residence are afraid that income earned abroad will be taxed twice, i.e. in the country of residence and in the State in which the work is carried out. In order to avoid such a situation, an appropriate method of avoiding double taxation should be used. The provisions of double taxation conventions and the provisions of relevant acts determine the method which is applicable in a given case.
1. Problem of double taxation
An individual with Polish tax resident status who obtained any income abroad should tax it in Poland. The obligation in question results from Article 3(1) of the Personal Income Tax Act of 26 July 1991 (i.e. Official Journal of 2022, item 2647, as amended), hereinafter referred to as the Act, setting out unlimited tax liability. This provision states: If natural persons have their domicile in the territory of the Republic of Poland, they are liable to taxation of all their income (revenue) regardless of the location of the sources of revenue (unlimited tax liability).
Tax Acts of other countries define unlimited tax liability in a similar way.
Limited tax liability shall be distinguished from unlimited tax liability. It applies to persons who don’t have the status of a tax resident of a given country, but earned income there. They are obliged to pay tax in the country of income only on income received in the territory of this State. Thus, a Polish tax resident who obtained income abroad should tax it in the country of its receipt. However, the obligation in question doesn’t exclude the necessity of taxation of income reveived abroad also in the State of tax residence. This means that it’s necessary to pay tax on the same income both in the country of its receipt and in the State of tax residence of the taxpayer. In other words, there will be double taxation of the same income.
2. Methods of avoiding double taxation
Methods of avoiding double taxation prevent double taxation of income. Analysing the content of double taxation conventions concluded by Poland with other countries and of the Act, two methods should be distinguished:
- method of exemption with progression,
- proportional deduction method (also known as the method of proportional credit, the tax credit method).
The relevant double taxation convention and national tax legislation determine the method which is applicable in a given case.
It should be noted here that over the last few years, the method of avoiding double taxation was changed in some double taxation conventions concluded by Poland. The modification is related to the entry into force and validity of the MLI Convention. The agreement concluded by Poland with Belgium constitutes an example of a contract in which a change in the method of double taxation occurred. Until 2020, this agreement provided for the application of the method of exemption with progression. From 2021, the proportional deduction method is used. Therefore, it’s always necessary to check which method applies in a given case.
3. Method of exemption with progression
Article 27(8) of the Act defines the method of exemption with progression. This provision states: In the event that the taxpayer referred to in Article 3(1), in addition to taxable income, in accordance with paragraph 1, has also earned income from activity performed outside the territory of the Republic of Poland or from sources of revenue located outside the territory of the Republic of Poland, which are exempt from tax under double taxation conventions or other international agreements – the tax is determined as follows:
- income exempt from income tax is added to the income subject to this tax and the tax is calculated on the sum of that income in accordance with the scale set out in paragraph 1;
- the interest rate of this tax is determined to the amount of income calculated in this way;
- the interest rate determined in accordance with point 2 is applied to the income subject to income tax.
It clearly results from the quoted provision that in a situation where the method of exemption with progression applies, the taxpayer is obliged to pay tax only on income earned in Poland. He/She doesn’t pay tax on income obtained abroad. However, this income has an impact on the amount of tax liability. In order to determine the interest rate of the tax, the income earned in the country of residence and abroad should be summed up.
At the time of writing this article, the method of exemption with progression applies to Polish tax residents earning income from work performed, among others, in the Czech Republic, France, Luxembourg, Germany, Switzerland.
4. Proportional deduction method
The Polish legislator regulated the proportional deduction method in Article 27(9-9a) of the Act. This method consists in deducting the tax paid abroad from that one calculated on the sum of income obtained in Poland and abroad in the fiscal year. 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 (the so-called tax credit limit).
The method of proportional deduction applies if it’s explicitly stated in the double taxation convention. It was indicated, among others, in Poland’s agreement with Austria, Belgium, Denmark, Greece. The method in question is also used in the event that Poland hasn’t concluded a double taxation convention with the country in which the income was obtained.
5. Proportional deduction method and abolition relief
The proportional deduction method isn’t favourable to the taxpayer. Indeed, the tax calculated using this method is significantly higher than that one calculated using the method of exemption with progression. The abolition relief serves to eliminate unfavourable diffrences. Its mecanism and conditions for its application are described in Article 27g of the Act.
The provision of Article 27g(1) and (2) of the Act allows the taxpayer to 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 that one calculated with the method of exemption with progression. However, the deduction can’t exceed the amount of PLN 1,360. Exceptionally, it’s possible to make a full deduction. Such a possibility arises in the event that the taxpayer obtains income from work or services performed outside the land territory of States, coming from the following sources:
- from a business relationship, employment relationship, home based work, cooperative employment relationship,
- from the performance of services, on the basis of a contract of mandate or a contract of specific work, obtained only from an individual conducting an economic activity, a legal person and its organisational unit, as well as an organisational unit without legal personality, with the exception of revenue obtained on the basis of contracts concluded as part of the taxpayer’s non-agricultural economic activity;
- 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, with the exception of revenue received by persons, regardless of how they are appointed, who are members of management boards, supervisory boards, commissions or other authorities constituting legal persons.
The abolition relief may be used by a Polish tax resident who obtained income abroad from the following sources, i.e.:
- 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 Poland, with the exception of income (revenue) obtained from the use or disposal of these rights.
It also applies to the tax calculated in accordance with Article 30c of the Act (Article 27g(4) of the Act).
The relief in question doesn’t concern 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). It also doesn’t apply to income obtained in States with which Poland has concluded a double taxation convention, and providing for the application of the method of exemption with progression.
6. Legal notice
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