Limiting the use of abolition relief in PIT

The abolition relief has been introduced into the Polish legal order and will cease with 25 July 2008 special solutions for taxpayers obtaining certain revenues outside the territory of the Republic of Poland 1 (Further: u.r.p.p.RP).

It refers to the income generated by Polish taxpayers from working abroad, and its aim is to offset the difference in the amount of income tax paid by those persons resulting from the difference between the methods on which the tax on income generated abroad is applied, i.e.

the differences between the so-called proportional deduction method and the method of exclusion with progression. From 1 January 2021 There are amounts to be paid in the use of abolition relief by taxpayers.

1. Introduction

The method of proportional deduction is that the income generated abroad is taxed in Poland, but the income tax due in Poland is deducted from the tax paid abroad. However, this deduction is only possible up to the amount of tax proportionally per income generated in a foreign country.

Example

Katarzyna Malinowska is a Polish tax resident. January to August 2020 She worked in Poland – she was employed under a contract of employment in C. z o.o. For this reason, she obtained an income of 40,000 PLN. September 2020 Ms Malinowska left for the Netherlands, where she was hired for the period 3 months by Company A B.V. At that time, it achieved income of 60,000 PLN (on the basis of Polish gold), from which an advance was collected for the benefit of the Dutch tax in the amount corresponding to 10,000 PLN.

In accordance with the double taxation agreement (hereinafter referred to as the UPO) concluded between Poland and the Netherlands, the method of proportional deduction should be used to tax income generated in the Netherlands. In order to determine the amount of income tax to be paid in Poland by Katarzyna Malinowska (for simplification the tax-free amount, income deductions and tax deductions were omitted):

1) sum up the amount of income generated in Poland with the income generated in Holandia:

• 40,000 PLN + 60,000 PLN = 100,000 PLN,
• 2) from the above sum of revenue, calculate the amount of tax payable according to the formula: (85,528 PLN × 17%) + (Over-total revenue used in Poland and the Netherlands 85,528 PLN × 32%): (85,528 PLN × 17%) + (14,472 × 32%) = 19,170.8 PLN,
• 3) to calculate the limit of tax paid in the Netherlands for deduction in Poland, as follows: (amount of income earned in the Netherlands ÷ sum of income) × amount of tax payable in Poland: (60,000 PLN ÷ 100,000 PLN) × 19,170.8 PLN = 11,502, 48 PLN.

The tax paid in the Netherlands after being converted into Polish gold was 10,000 PLN. As it is included in the deduction limit 11,502.48 PLN), may be deducted in full. Consequently, after deduction of foreign tax, Poland remains to be paid 9,171 PLN.

If the method of exemption is applied with progress, the foreign income of the Polish taxpayer is taxed only in the country where the work is carried out. It is excluded from the tax base in Poland and its amount is taken into account only when determining the tax rate on other taxable income in Poland on a tax scale.

Example

Jan Kowalski is a Polish tax resident. From 1 January 2020 to 31 May 2020 the taxpayer was employed on the basis of a contract of employment in A. sp. z o.o. based in Poland and thus obtained income of 40,000 PLN (after deduction of social security contributions) subject to taxation in Poland.

In addition, from July to September 2020 Mr Jan also worked in Germany, where he achieved income (in euro), the amount of which is calculated as Polish gold 60,000 PLN.

According to the UPO concluded between Poland and Germany, the tax treatment of income generated in Germany by the Polish taxpayer should be subject to a method of exclusion with progress.

As a result, in order to determine the amount of income tax that Jan Kowalski should pay in Poland on income generated in Germany, the tax-free amount, income deductions and tax deductions should be disregarded (for simplification):

1) sum up the amount of income generated in Poland with income generated in Germany:

• 40,000 PLN + 60,000 PLN = 100,000 PLN,
• 2) on total income, calculate the mortgage tax, according to the formula: (85,528 PLN × 17%) + (Surplus income generated in Poland and Germany 85,528 PLN × 32%): (85,528 PLN × 17%) + (14,472 × 32%) = 19,170.8 PLN,
• 3) set an effective interest rate — by formula: (hypothetical tax ÷ total income × 100%: 19,170.8 PLN ÷ 100,000 PLN × 100% = ~19.17%,

1. establish the amount of tax to be paid in Poland – according to the formula: (amount of income obtained in Poland × effective interest rate): (40,000 PLN × 19.17%) = 7,668 PLN. Jan Kowalski will therefore be obliged to pay the amount in Poland 7,668 PLN income tax on income obtained in Poland (the income obtained in Germany is entirely excluded from taxation).

The method used depends on the country in which the taxpayer achieves revenue and is determined by the UPO concluded between Poland and that country.

The abolition relief applies to Polish tax residents receiving income in the country with which Poland concluded the UPO, which provides for the application of the proportional deduction method. This benefit will be applied when the foreign tax does not offset the Polish tax liability in its entirety.

The difference in the tax due is then offset by the application of the abolition relief. Thanks to the relief, Polish residents who account for foreign income in accordance with the proportional deduction method do not pay tax in Poland, as do tax payers using the non-progression method (although they are obliged to testify).

PIT-36 and PIT/ZG). As a result of the abolition relief, the final amount of tax paid in Poland on income generated abroad remains the same, regardless of the method the taxpayer should apply.

It should be noted that the abolition relief covers only the sources of income chosen. According to Article 27g(1) Act on 26 July 1991 of income tax on natural persons 2 (Further: u.p.d.o.f.), the scope of the abolition relief covers foreign income:

• 1) the employment relationship,
• 2) from activities carried out in person (e.g. contract of commission/works),
• 3) from non-agricultural economic activity,

1. in the field of copyright and related rights in the understanding of separate provisions, from artistic, scientific, educational and public activities performed outside the territory of the Republic of Poland, except for income (revenues) obtained from the exercise of these rights or the provision of them.

The benefit is also excluded from the scope of the reduction in countries applying harmful tax competition (so-called tax havens).

2. Restriction on the use of abolition relief

From 1 January 2021 There are quotas for the benefit of abolition relief. Under the new rules, taxpayers may continue to deduct the amount of the benefit from the income tax, but only up to a maximum of 1,360 PLN. The limitation is provided for in Article 27g u.p.d.o.f.

and means de facto limiting the abolition allowance to the amount reducing the contribution referred to in Article 27(1a)(1) u.p.d.o.f. 1,360 PLN in the tax year.

As a result, the Polish tax resident will have to pay the difference between the income tax calculated in Poland and the tax paid abroad (taking into account the deduction in the amount of 1,360 PLN).

This limitation will not have any meaning for taxpayers – Polish residents – gaining income in the countries with which Poland concluded UPO providing for the application of the exemption method with progress (for example in Germany, for such UPO has concluded Poland with Germany).

The income generated by the tax payer abroad benefits from income tax exemption in Poland, but it must be taken into account when calculating the rate applicable to taxation of income received by the taxpayer in Poland. Nor does the amendment apply to persons working or providing services outside the land territory of the countries (e.g.

seafarers or persons working on ships and drilling platforms). This change will be felt by Polish tax residents gaining income in countries with which Poland has a signed UPO providing for a proportional deduction method (tax credit), e.g. working in the UK or the Netherlands, where the income tax free amount is relatively high.

It should be stressed that the abolition relief can only be applied by Polish tax residents subject to unlimited tax obligations in Poland. This means that the relief will not apply to people who do not have a Polish tax residence.

The issue of the Polish tax residence was regulated in Article 3(1-1a) s.p.d.o.f., from which it follows that financial persons, if they are resident in the territory of the Republic of Poland, are subject to a tax obligation on their total income (residences), irrespective of where the source of income is situated (unlimited tax obligation). A person residing in the territory of the Republic of Poland is considered to be a physical person who:

• 1) has in the territory of the Republic of Poland a centre of personal or economic interests (the centre of life intellects) or
• 2) has been in the territory of Poland for longer than 183 days per tax year.

According to the above conditions, the holding of the Polish tax residence does not prejudge the holding of Polish citizenship or residence in Poland, but the fulfilment of at least one from above conditions.

In the context of establishing the Polish tax situation, it is important to assess in which countries the taxpayer has a centre of interest in life.

According to the jurisprudence of the administrative courts, in order to assess this issue from the point of view of the natural person, the personal and economic relationships of the natural person with the country concerned must be taken into account, among which are important family, social, employment, political, cultural and all other activities, the place of economic activity and the place where the person manages his or her property.

For example, in the above issue, the WSA in Łódź spoke – in the judgment of 5 October 2017 3 .

The establishment of a tax residence is therefore of decisive importance to the facts and not the formal ones. In view of the above, if the conditions for recognising the taxpayer as a Polish tax resident are not met, the income obtained from working abroad is not taxed in Poland, and this means that in this case the abolition relief will not be found.

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1 Act of 25 July 2008 special solutions for taxpayers who obtain certain revenues outside the territory of the Republic of Poland, i.e. Journal of Laws of 2008, item 894.

2 Act of 26 July 1991 on income tax on individuals, i.e. Journal of Laws of 2020, item 1426 as amended

3 Ref. Act I SA/Łed 493/17, Legalis.

The article comes from the book C.H. Beck Publishing House “A Review of Tax Changes 2021”, https://www.ksiegarnia.beck.pl/ 19763-tax review-change-2021-Agnieszka-bienkowska