8 December 2020

Taxation of income from Norway for Polish tax residents

At the beginning of 2021, the provisions of the Multilateral Convention (MLI) will take effect in several European countries. Main changes concern the taxation of income method for tax residents. This is important for Polish residents earning their income in Norway, Belgium, the Netherlands, Denmark, and Canada, among others.

The crucial change will concern the method of settlement for income earned abroad. More specifically: currently in force, the “exemption with progression”, will be replaced by the “proportional deduction.” It will apply to income resulting from the service relationship, employment relationship, outwork, and a cooperative employment relationship.

Taxation of income – who is covered by the new rules?

Over the last few years, the provisions of the MLI entered into force progressively, covering subsequent countries depending on the date of deposit of the fifth instrument of ratification. Since 2020, the new method (proportional deduction) is used by residents of other countries popular among economic emigrants from Poland, including Great Britain, Ireland, and Slovakia.

At this point, it is worth recalling the definition of tax residence. A tax resident is a person who physically resides in a particular country, has a center of personal and economic interests there, or is staying in its territory for more than 183 days in a tax year.

Thus, Polish tax residents, as persons receiving income from contract work performed outside Poland, in countries where the method of exemption with progression was in force so far, did not have to deduct income tax in Poland. This assuming that foreign earnings were their only source of income.

In other words, the whole fiscal year with only Norwegian income, with no additional taxable income in Poland, obligated the taxpayer to submit a tax return only in Norway.

Proportional deduction method from 2021

Starting from January 1st, 2021, taxpayers earning in Norway (and other countries according to the MLI Convention schedule) will be subject to a proportional deduction method. In short: Norwegian income is taxable in Poland, and additionally, an amount equal to the income tax paid in Norway is deducted from the tax calculated on the total amount of earnings (Norwegian and domestic).

Please note that the amount deducted may not exceed the part of the pre-deduction tax which is proportionately related to the income earned in Norway.

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, in which he presents and settles foreign income.

Taxation of income abroad and tax reliefs

In special cases, taxpayers can still count on statutory tax reliefs. Employees on a business trip should remember about the 30% tax exemption under Art. 21, section 1, point 20 of the Personal Income Tax Law. The relief applies to taxpayers remaining in a service relationship, employment relationship, outwork, and a cooperative employment relationship, employed in a state facility or local government unit, for a business trip outside the country. The amount of the exemption relates to the subsistence allowances and should be charged for each day, in the value corresponding to 30% of said allowance.

The new method of calculating the amount of income tax includes the possibility of using the so-called tax abolition relief. It is intended for taxpayers who obtained income abroad, in a country with the proportional deduction method (which will come into force in Norway from January 1st, 2021, and will apply to revenues obtained from 2021).

In practice, the tax abolition relief equates income tax to the amount of tax in the method of exemption with progression. Its amount is therefore equal to the difference between the tax calculated using the proportional deduction method and the tax calculated using the exemption with progression method. The abolition allowance applies only during the annual settlement.

However, please note that under the Law of November 30th, 2020, the provisions on personal income tax will change at the beginning of 2021. The new regulations will significantly affect the upper threshold of the abolition allowance. More on this topic in a separate article.

Settlement dates

Revenue earned in Norway for 2020 should be settled in the period from February 15th to April 30th, 2021.

For the settlement of 2020, the method of exclusion with progression and the possibility of using the tax abolition relief in the unchanged form still apply.

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ARPI Accounting is a part of ARPI Group, a Norwegian holding which started to operate in Poland in 2001.