Abolition relief – questions and answers

The risk of double taxation of the same income (at the place of income development and at the place of residence, i.e.

in Poland) is to be countered by bilateral double taxation agreements (hereinafter referred to as UPOs), which specifically specify issues such as tax residence, definition of establishments or income which are taxed in contracting countries, as well as methods of avoidance of double taxation, which distinguish here the method of exemption with progression and the method of proportional deduction (also referred to as the method of proportional credit or tax credit).

The abolition relief is a solution, thanks to which the final amount of tax on income generated abroad, actually paid in Poland, regardless of the method used by the taxpayer, is the same as using the rule of exemption with progression.

The method of exclusion with progress is that income from employed labour obtained in another country is taken into account in the annual account filed in Poland only when the taxpayer has also achieved income subject to taxation in Poland on a general basis.

Revenue from working abroad, exempt from taxation under bilateral agreements, is then used to establish an interest rate, which will then be applied to income taxation in Poland. In general, this method is much more favourable to the taxpayer and reduces its fiscal burden.

The method of proportional deduction is to take into account that the taxpayer deducts from the Polish tax an amount equal to the tax paid abroad in the annual settlement made in Poland on the total income generated in Poland and abroad. A comparison of both methods will be presented in the following part of this analysis.

The use of these two methods for income generated in different countries was widely seen as socially unfair, predicating the inequality of taxpayers and equivalent to double taxation (especially as regards the proportional deduction method).

However, it was not possible to make changes in this area through statutory standardization, as UPOs, as international agreements ratified with prior agreement expressed in the Act, have constitutional priority in the hierarchy of sources of law, and changes to individual UPOs may either be impossible or unacceptable to the other country.

The solution to this problem was the introduction based on Act dated 25 July 2008 special solutions for taxpayers obtaining certain revenues outside the territory of the Republic of Poland (Journal of Laws, item 894 as amended) Article 27g to Act dated 26 July 1991 on personal income tax (i.e.

Journal of Laws of 2020, item 1426 as amended, Next: the Personal Income Tax Act), That is, the abolition relief regulations. In the end, it eliminates the differences that arise in the burden on taxpayers using different methods of avoiding double taxation.

Who is affected by abolition relief?

According to Article 27g the Personal Income Tax Act Abolition allowance shall be granted to any taxable person holding a tax residence in Poland accounting on a specified basis. Under Article 27(9) and 9a the Personal Income Tax Act, (i.e. according to the proportional deduction method) income from, inter alia:

• • foreign business relationship, employment relationship, overlay work and cooperative employment relationship (but not applicable to foreign occupational pensions income), defined under Article 12 the Personal Income Tax Act;
• • revenue from so-called activities carried out in person specified under Article 13 the Personal Income Tax Act;
• • revenues from economic activity realised outside the territory of the Republic of Poland (it does not matter how these revenues are taxed: according to tax scale, linear 19%-that rate of taxation or in flat-rate forms;
• • revenue from copyright and related rights from artistic, literary, scientific, educational and public activities carried out outside the territory of the Republic of Poland, except income (revenues) obtained from the exercise or disposition of these rights.

For the last group, this gives rise to some kind of complication because it is not possible to obtain income from rights without simultaneously ordering or exercising those rights.

It can be assumed that the intention of this arrangement was to distinguish between the situation in which the creator or artist's income arose in connection with the performance of personal creative or artistic activities abroad from the case in which the creator or artist receives foreign revenue from the sale or establishment of a licence to his works or artistic performances, without undertaking any actual activities abroad to obtain these revenues.

However, the provisions are incorrect and do not provide for such an effect.

How does the abolition relief affect the tax settlement?

As highlighted above, the tax settlement for income generated abroad, using a method of exemption with progression or using a proportional deduction method, results in a different fiscal burden on the taxpayer. This is illustrated by the example below.

The taxpayer earns income in Poland 20,000 PLN, the income generated abroad is 30,000 PLN, which together gives income in the amount 50,000 PLN.

Table 1. Comparison of taxation of foreign income using double taxation methods.

Derogation method with progression

Method of proportional deduction

Revenue in Poland

20,000

20,000

Income abroad

30,000

30,000

Total income

50,000

50,000

Tax paid abroad

1,000

1,000

Tax by tax scale

7,975

7,975

Interest rate

15.95% [1]

N/D

Tax to be paid in Poland

3,190 PLN

6,975

It is important, however, to emphasise that there is a limit to the proportional deduction method to which the value of the tax paid abroad can be deducted. The deduction of foreign tax must not exceed that part of the tax which is proportional to the income generated abroad. In the above example, the value of this limit is 4,784.93 PLN [2] . If the tax paid abroad was e.g. 5,000 PLN that could only be deducted up to the limit.

The difference between methods in a given example is 3,785 PLN (i.e. 6,975 PLN – 3,190 PLN). With an abolition relief, the taxpayer is able to offset the differences between the two methods.

According to Article 27g(2) the Personal Income Tax Act „The amount to be deducted shall be the difference between the tax calculated in accordance with Article 27(9) or (9a) (the proportional deduction method) and the amount of tax calculated on revenue from the sources in question Under section 1, by applying to these revenue the rules laid down under Article 27(8) (the method of exclusion with progression)’.

This means that, in the end, the taxable person ‘scores down’ the tax to be paid up to 3,190 PLN, Whereas the value of the relief is, in this example, 3,785 PLN. This amount is to be shown in the PIT/O as other tax deduction and then transferred to the declaration PIT-36.

The problem, however, is the lack of the possibility of taking allowance into account when calculating advances on income tax collected by payers. It also needs to be stressed that, through abolition relief, the tax can only be reduced to the amount of tax due in Poland, so to the value 0 PLN.

Has the amendment abolished the abolition relief?

The answer to that question is no, she couldn't take it. Amendment introduced by the legislator as from 1 January 2021 Article 27g by Article 1(15) point (a) Act dated 28 November 2020 (Journal of Laws of 2020, item 2123) has significantly reduced its use.

The current wording of this Article is as follows: ‘The deduction shall be made in respect of the amount constituting the difference between the tax calculated in accordance with Article 27(9) or (9a) a amount of tax calculated on revenue from the sources concerned Under section 1, by applying to these revenue the rules laid down under Article 27(8).

However, that deduction may not exceed the amount of the tax reduction in question under Article 27(1a)(1).”. The amount referred to in the provision is the tax reduction amount which is currently equal to 1,360 PLN.

Thus, given the above example, the abolition relief would be the maximum possible value 1,360 PLN, the tax to be paid would be 5,615 PLN, or o 2,425 PLN more than with a relief before the amendment.

Is the taxpayer who earns income from working in the UK for half a year and who does not receive any revenue in Poland obliged to pay tax in Poland and can he benefit from an abolition relief?

In order to be able to answer this question precisely, the question of the tax residence of such a taxpayer should be considered. According to Article 3(1a) the Personal Income Tax Act a person residing in the territory of the Republic of Poland (and thus subject to the obligation to settle taxes in Poland) is considered to be a natural person who:

• • has in the territory of the Republic of Poland a centre of personal or economic interests (the centre of life interests), or
• • stays in the territory of the Republic of Poland longer than 183 days in the tax year

Thus, a person in Britain for six months can meet second from the conditions of recognition as a person who is a Polish tax resident, as this depends on proving that he spends sufficient days outside the territory of the Republic of Poland. Even if he is in the UK all year long, however, he can be considered a Polish resident if, for example, most of the money is transferred to his family in Poland, he has investments, movable and immovable assets, insurance policies, bank loans or bank accounts or otherwise understood center of personal interests.

In this case, look at the UK-signed UPO. As a result of the ratification by both parties of the Multilateral Convention (MLI) from 1 January 2020 The method of avoiding double taxation for Polish tax residents achieving taxed income in the UK has changed.

From 2020 Polish residents account for income generated in the UK on the basis of the proportional deduction method, in accordance with the further provisions of the signed UPO, and if their sources of income so permit, they may apply an abolition relief in tax settlement.

However, for revenue generated In 2021 the amount of this relief will be maximum 1,360 PLN.

Damian Kuszewski

The author is a graduate of the Warsaw School of Economics in Finance and Accounting, and the Faculty of Law at SWPS University of Humanities and Social Sciences. From 2018 Associated with Russel Bedford Poland. His professional interests are tax law and, in particular, income taxes.