Double taxation – details for PIT payers earning abroad

Poland, like other European countries bound by the arrangements of the MLI Convention, is subject to changes in the rules for accounting for foreign income. The currently applicable method – the proportional deduction method – means that the Polish PIT payer is obliged to submit a tax return in Poland showing income from work outside the Republic of Poland.

Below we present the most important details that will allow you to avoid double taxation, settle the income tax on foreign earnings properly and on time.

The MLI Convention – double taxation

First, a few words of explanation of what the MLI Convention is. It is a multilateral convention that implements the measures of the tax law to prevent base erosion and profit shifting, drawn up in Paris on November 24th, 2016, and signed in Paris on June 7th, 2017.

The effects of the provisions of the convention are the developed mechanisms of preventing these activities, which result in the reduction of the tax base and the transfer of income to jurisdictions with low or no taxation. Each country that joins the MLI is required to adopt the so-called minimum standard of application, which can be reduced to the following directives:

• adopting a clause allowing for the non-granting of treaty benefits if obtaining them was one of the main goals of creating structures / concluding transactions;
• avoiding double taxation rather than creating a chance for avoiding taxation at all;
• improvement of the mutual communication procedure: new standards, dispute resolution, and state tax cooperation.

In recent years, the provisions of the MLI Convention entered into force progressively, covering subsequent states depending on the date of deposit of the fifth instrument of ratification. Starting from 2020, the new method (proportional deduction) is already used by residents of countries popular among economic emigrants from Poland, incl. in Great Britain, Ireland and Slovakia. Next:

• 2021: Norway, Belgium, Canada, Denmark, Portugal, Russia, Latvia, Czech Republic.
• 2022: Jordan, Pakistan, Greece, Hungary, Croatia.
• 2023: Estonia.

DTT – agreements on the avoidance of double taxation

The practical effect of adopting the convention changes in (selected or all) double taxation treaties (DTT). Namely, it is about changing the method of avoiding double taxation – from the exclusion (exemption) method with progression to the proportional deduction method. It will apply to income resulting from the employment relationship, employment relationship, outwork, and the cooperative employment relationship.

Proportional deduction method

The new method is based on the fact that foreign income is subject to taxation in Poland, and in addition, an amount equal to the income tax paid abroad is deducted from the tax calculated on the total sum of earnings (foreign and domestic).

A taxpayer temporarily staying abroad and earning income from work there, after returning to Poland, is obliged to make an advance payment for the PIT income tax. The amount of the advance payment is 17% of income or the appropriate rate according to the tax scale.

It should be remembered that the amount of the deduction may not exceed that part of the tax calculated before the deduction is made, which proportionately corresponds to the income obtained outside Poland. Possible tax relief (e.g. abolition) may be applied only with the annual settlement.

A resident-taxpayer, using the new method of proportional deduction, must submit an annual tax return in Poland (PIT-36) with an attachment PIT/ZG. Which is information about the amount of income/revenues from abroad and the tax paid.

Tax residence assessment

At this point, it is worth recalling the definition of tax residence. A tax residence is a place of earning for tax purposes. On the other hand, a tax resident is a person physically residing in a given country, having a center of personal and economic interests there, or staying on its territory for more than 183 days in a tax year.

In situations where the taxpayer has two parallel tax residences, the settlement of the place of income tax payment should be sought in the applying DTT. The conflict of laws rules set out the rules by which to analyze and identify the correct residence. However, the determination procedures can be reduced to certain commonly accepted rules, e.g. if the taxpayer moves permanently with his entire family outside the territory of the Republic of Poland, then it can be concluded that he has ceased to be a Polish tax resident.

The change of the method will apply in particular to those employees who periodically emigrate for economic reasons outside the territory of the Republic of Poland and return to Poland to their families. In this case, as a Polish tax resident, the employee is subject to tax in Poland on his entire income.

Deadlines

1. Advance payment: by the 20th of the month following the month in which the taxpayer returned to the country. If the advance payment date falls after the end of the tax year, the following period shall apply.

2. Annual settlement: for 2021, to be made in the period by April 30th of the year following the tax year.