Employees going to work abroad very often ask the question: who is a tax resident or a tax non-resident? This question is posed both by employeees who are going to work abroad for the first time and by those ones who are experienced in working in other countries. Both of them are often unpleaseantly surprised by the foreign offices with summonses and penalties for not submitting the annual return. Below, we will try to explain these difficult concepts in the most accessible way possible.
1. Concept of tax residence
Everyone who receives remuneration is obliged to pay tax on it. Most often, this requirement is fulfilled for the worker by the employer collecting an advance payment of income tax from the salary each month and paying it to the tax office (Polish and foreign). After the end of the tax year, each employee must settle the tax himself/herself. He/She does this on an annual basis in which he/she collects all his/her income and finally settles the tax due.
In the event that an employee worked abroad, the following question very often arises: to which tax office should I submit my tax return? To the office in Poland – where I live, or to that one abroad?
And this is where the concept of tax residency, i.e. a kind of “tax citizenship”, appears. It determines which country we are “closer to in terms of taxes”.
2. How to correctly determine the tax residence of a posted employee
Of course, there are provisions that define how to determine the tax residence of an employee. There are tax regulations – income tax acts, Polish and foreign – and a “special” additional provision – the double taxation convention. Poland has signed such a double taxation convention with almost every country. These agreements specify the rules for determining tax residency and the State where tax should be paid. These regulations lead to a general, basic conclusion – where you have the centre of your life’s interest, there you are tax resident and there you pay tax.
An attestation from the tax office constitutes a confirmation of tax residence. Polish tax regulations call this document: the certificate of residence. According to Article 5a point 21 of the Personal Income Tax Act of 26 July 1991 (i.e. Official Journal of 2020, item 1905, as amended), hereinafter referred to as the Income Tax Act, a certificate of residence is an attestation concerning the taxpayer’s domicile for tax purposes, issued by the competent tax administration authority of the taxpayer’s State of residence.
Tax regulations don’t specify the content of the certificate of residence. However, appropriate guidance can be found in the individual interpretation of the Director of the Tax Chamber in Bydgoszcz of 12 June 2008, ITPB3/423-211/08/AM. It indicates that: “The definition of residency in international tax law results from conventions for the avoidance of double taxation on income and on capital. As these agreements don’t specify the applicable form of the certificate of domicile or head office, the certificate of residence isn’t always issued on a formalised form, and it doesn’t have to explicitly include the name “certificate of residence”. It results from the content of these provisions that the certificate of residence should fulfil at least the following conditions:
- be issued by the competent tax administration,
- determine the taxpayer’s place of residence (domicile or registered office) for tax purpose,
- include the date of issue of the certificate and/or the date on which tax residence is confirmed.
Therefore, each certificate issued by the competent tax authority (valid on the date of payment) and confirming the entity’s tax residence in this country is sufficient.”
The certificate of residence is valid until the facts confirmed therein change.
The Tax Office issues a certificate of residence at the request of the taxpayer (Article 306l of the Act of 29 August 1997, Tax Ordinance (OJ 1997, No. 137, item 926, as amended).
3. Centre of vital interests
The centre of vital interests (the term “centre of life’s interests” is also used) is determined by everyone independently and on their own – somewhat intuitively. It arises where the tax payer has the majority of personal and economic connections. As explained by the Director of the Tax Chamber in Katowice in an individual interpretation of 4 June 2014, IBPBII/1/415-189/14/BJ: “The “centre of personal interests” should be understood as all family connections, i.e. the hearth of the home, social, political, cultural, civic activities, membership of organisations/clubs, practising hobbies, etc. On the other hand, the “centre of economic interests” is primarily the place of conducting gainful activity, sources of income, investments held, immovable and movable property, insurance policies, loans taken out, bank accounts, etc.”
Posted workers in Poland most often leave here their home, family, children who attend school in Poland, their car is registered here, most of their assets, etc. Hence, it’s quite easy to determine that their centre of vital interests is in Poland.
4. Magical 183 days for posted workers
The obligation to pay tax in the State to which the employee has been posted also sometimes depends on the period of stay in that country. Such a “magic” limit is the 183-day limit. The provisions of double taxation conventions link the exceeding of this limit with the requirement to pay income tax advances to the tax office of the State to which the employee has been posted.
a. Should days spent abroad be counted?
Yes.
b. Why count days spent abroad?
Days spent abroad shall be counted in order to determine in which country advance income tax payments should be made. However, this has nothing to do with the fact of changing tax residence. As long as the tax payer doesn’t move his/her centre of vital interest abroad, he/she doesn’t have to change his/her tax residence, regardless of the number of days spent abroad. Even if the taxpayer doesn’t spend a single day in Poland in a given tax year, but he/she has family, a house, bank accounts etc. here, he/she is still a Polish tax resident.
c. How to count days spent abroad?
On a calendar – simply. Of course, the method of keeping such records will depend on the intensity and number of travels. The easiest way is to mark the periods or days of stay in a given country and add them up on an ongoing basis. Adding up is important in that it allows to “catch” the moment of exceeding 183 days of stay in a given State, which often entails the obligation to change the country of advance payment of income tax.
Days of physical presence in a given State are counted. However, any part of a day, even a very short one, spent by a taxpayer in a given country is counted as a day of presence in that State. Therefore, the day of arrival and departure, all other days spent in a given country (including Saturdays and Sundays, national holidays, leaves before, during and after the end of activity, sick days and days taken due to death or illness in the family) should be counted as days of presence. On the other hand, days spent in this State while travelling between two places outside the country shouldn’t be taken into account. When counting 183 days of stay in a given country, every full day spent outside that State shouldn’t be taken into account, regardless of its purpose (e.g. business trip, vacation) (see individual interpretation of the Director of the National Tax Information of 26 February 2018, 0113-KDIPT2-3.4011.3.2018.1.AC ).
d. In which periods should the days spent abroad be counted?
In order to determine the period within which the days spent abroad are counted reference should be made to the content of the double taxation convention linking Poland with the country in which the employee stays. This is usually the tax year (however, the tax year doesn’t always have to coincide with the calendar one). Such a period may also be the calendar year, or a twelve-month period beginning or ending in the given tax year.
5. You live in Poland = you have Polish tax residence
Article 3(1) of the Income Tax Act stipulates the so-called unlimited tax liability. It results from this provision that naturals persons having their domicile in the territory of Poland are subject to tax obligation on all their income (revenue), regardless of the location of the sources of revenue. Thus, the determination of the taxpayer’s place of residence is of key importance when determining Polish tax residence. Article 3(1a) of the Income Tax Act is helpful in this respect. According to this provision, a person having his/her domicile in Poland is an individual who:
- has a centre of personal or economic interests (centre of vital interests) in the territory of the Republic of Poland or
- stays in Poland for longer than 183 days in a tax year.
The above premises are alternative. This is indicated by the use of the conjunction “or” in the content of the provision. This means that it’s sufficient to fulfil only one of the above conditions to be treated as a Polish tax resident under Polish tax law.
The assessment of whether a given person is a Polish tax resident should be made individually, taking into account the provisions of the relevant double taxation convention.
6. Practically every employee posted from Poland to work abroad is a Polish tax resident
This is, of course, a kind of simplification. However, there is a lot of truth in it. Even though posted employees are working abroad, they are associated with a Polish company, in Poland they have their home, family, children going to school, a registered car, most of their personal belongings etc. In other words, the centre of their life interests is in Poland. Of course, it may happen that a person posted from Poland to work abroad has the centre of his/her life interests, and thus tax residence, in a country other than Poland. However, these situations are quite rare.
7. Polish tax residence but advances paid abroad
a. Tax and tax advance payment
Tax isn’t the same as tax advance payment. Tax is the amount of money that we pay for the whole year, for all income: from work in the country, abroad, from benefits, from rent, etc. On the other hand, the tax advance payment is the obligation to pay a previously determined tax advance to the tax authority. Tax advances payments are made at appropriate intervals – usually monthly.
b. Double taxation conventions
It isn’t uncommon for advance payments of income tax on the salary of an employee posted abroad with Polish tax residence to be made to the tax office of the country to which he/ she has been seconded. This isn’t an error. Such a person still has Polish tax residence. However, as a result of circumstances specified by law, tax advance payments are made to the tax office of the country to which the worker has been seconded.
Circumstances giving rise to the obligation to pay income tax advances to the tax office of the State to which the employee has been seconded are determined by the double taxation conventions concluded by Poland with foreign countries. These agreements adopt the principle that remuneration from employment performed by a person resident in a given country is subject to taxation only in that State. If the work is done in the second country, then the remuneration earned from that work is taxable in that second State. However, there is an exception to this rule. The salary that an employee having his/her domicile in one country earns from an activity as an employed person, performed in the territory of the other State is subject to taxation only in the first country in the event that:
a) the recipient stays in the other country during one or more periods not exceeding a total of 183 days per year,
b) wages are paid by the employer or on behalf of the employer who doesn’t have a place of residence or the head office in this other State,
c) remunerations aren’t borne by an establishment or a permanent site which the employer has in this country.
If all the above-mentioned conditions are fulfilled, the taxpayer is exempt from tax in the country where the work was performed. He/She will only settle his/her taxes in the State where he/she lives.
c. Cessation of advance payment collection in Poland
The provision of Article 32(6) of the Income Tax Act authorises the employer to stop collecting income tax advances on income obtained by the employee from work performed abroad in the event that the employee’s income from work is or will be subject to taxation outside the territory of Poland. Therefore, the condition for the employer to stop collecting advance payments is to determine whether, in accordance with the appropriate double taxation convention, the seconded worker’s income is or will be subject to taxation outside Poland.
It should be noted that an employee may apply to the employer for the collection of income tax advances on income received from work performed outside the territory of Poland.
8. Annual tax return abroad
a. Annual tax settlement abroad
An employee who has performed work abroad must settle tax there. The tax settlement must be done in accordance with the rules applicable in that country. Therefore, it’s necessary to familiarise oneself with the income tax settlement rules in the State where the work was performed.
It isn’t necessary to settle tax in the country where the work was done if the circumstances specified above, where the taxpayer is only liable to tax in the country of residence, occur.
b. Annual tax return in Poland
A person who earned income both in Poland and abroad is also obliged to settle income tax in Poland. For this purpose, he/she submits the completed PIT-36 form together with the PIT/ZG attachment to the appropriate tax office.
Conversion of income earned abroad into PLN should be made at the average exchange rate of the National Bank of Poland (NBP) on the day preceding that one of receiving the remuneration.
It should be remembered that for each day at work abroad, an employee is entitled to a tax exemption in the amount of 30% of the value of the daily allowance applicable to the country in which the work was performed (Article 21(1)(20) of the Income Tax Act). The exemption doesn’t concern to the remuneration:
- of an employee who is on a business trip outside the Republic of Poland;
- of an employee in connection with his/her stay outside the borders of the Republic of Poland in order to participate in an armed conflict or to strengthen of the forces of the state or allied countries, to participate in a peacekeeping mission, actions to prevent acts of terrorism or their consequences, as well as in connection with the acting as an observer in peacekeeping missions of international organisations and multinational forces, as long as he/she receives benefits exempt from tax under section 1, point 83 or 83a of the Income Tax Act;
- received by a foreign service member;
- of an employee receiving revenue from an employment relationship obtained by persons under the age of 26 (Article 20(15) of the Income Tax Act).
c. Methods of avoiding double taxation
An employee settling his/her domestic and foreign income in Poland doesn’t have to fear that income earned in another country will be taxed twice: abroad and in Poland. Double taxation conventions provide for mechanisms to prevent double taxation. These are:
- method of exemption with progression,
- proportional deduction method.
The relevant double taxation convention determines the method which is applicable to the settlement of income obtained in a given country. However, in the event that the worker earned income in a State with which Poland hasn’t signed a double taxation convention the proportional deduction method is used.
If the exemption with progression method is applied, the income earned abroad affects the determination of the interest rate at which the tax due on the income obtained in Poland should be calculated. To use this method, it’s necessary to:
- add income earned abroad to the taxable income obtained in Poland;
- calculate tax on the determined sum of incomes according to the tax scale;
- divide the calculated tax by the sum of income earned at home country and abroad, and then multiply by 100;
- the result obtained constitutes the interest rate by which the taxable income earned in Poland should be multiplied, after rounding it to the nearest full PLN.
The proportional deduction method is characterised by calculating tax on income earned in Poland and abroad and then deducting from it the tax paid by the taxpayer abroad, but up to the amount of tax attributable proportionally to the income obtained in the foreign country. In order to calculate the limit for deductible tax paid abroad, it’s necessary to:
- add taxable income obtained abroad to taxable income in Poland;
- calculate the tax according to the tax scale from the sum of taxable incomes, after rounding them up to the nearest full PLN;
- multiply the tax calculated in this way by the income earned abroad and then divide by the sum of income obtained in Poland and abroad.
In the event that a worker being a Polish resident has obtained income under an employment contract in Poland and in countries with which the agreements provide for different methods of avoiding double taxation, both methods should be included in the tax return. At the same time, the method of avoiding double taxation defined by the provisions of the double taxation convention concluded with a given State is applied to income from that country.
d. Abolition relief
The proportional deduction method isn’t very favourable for taxpayers. Therefore, the legislator provided for the possibility of using the so-called abolition relief. It allows for a deduction from income tax of the amount constituting the difference between the tax calculated using the proportional deduction method and the tax calculated using the method of exemption with progression. This deduction can’t exceed the amount of PLN 1360.00 (Article 27g(2) of the Income Tax Act).
The abolition relief applies to taxpayers who are subject to unlimited tax liability, settle their accounts using the proportional deduction method and receive income from the following sources:
- from a business relationship, employment relationship, home based work or cooperative employment relationship,
- from an activity performed in person,
- from an 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 (Article 27g(1) of the Income Tax Act).
The abolition relief can’t be applied to income earned in countries and territories with harmful tax competition (Article 27g(3) of the Income Tax Act).
