Taxation of revenue of directors of British companies in 2020

The interest of Poles in the possibility of conducting business activity in the form of the LTD registered in the UK for some time, which has remained stable, will probably show a decreasing trend in the coming months. All due to changes in the content of the double taxation agreement as a result of the entry into force of the MLI Convention.

Multilateral convention to implement tax treatment-related measures to prevent base erosion and profit shifting is a multilateral convention implementing measures of Treaty tax law aimed at preventing erosion of the tax base and profit shifting, drawn up in Paris on 24 November 2016, signed in Paris on 7 June 2017 (hereinafter: ‘MLI Convention’ or ‘MLI Convention’).

The MLI changes the principles of taxation of certain revenues obtained by Poles in the UK. one of the key differences is to change the method of avoiding double taxation from the method of exemption with progression to the method of proportional deduction.

In view of the time limits for the adoption of the MLI Convention by both countries, these amendments apply to the income obtained by Poles from sources from the UK from the beginning 2020. In the following text, I will refer to the changes directly to the managers of LTD, and I will not deal with income from other sources (e.g.

employment).

Offers and information on the possibility of handling UK companies are still available on the network, but most of them have not been updated to the indicated changes in taxation under the rules applicable after the implementation of the MLI Convention. British companies are still a form of activity worth attention, but the decision to start such activities should be preceded by a sound analysis, allowing for a detailed assessment of the tax consequences of such a solution

The amendments indicated do not mean that automatically from the date 1 January 2020 Running LTD in the UK is becoming an unprofitable or inappropriate solution. It is crucial to understand the rules currently applicable to Polish residents holding the position of director in the UK company. This is important for the proper assessment of the tax costs associated with the use of such activities.

Taxation of revenue of directors of British companies to the end 2019

According to Article 15 UPO agreements [1] the remuneration of directors resident in Poland, for membership of the board of directors of a company established in the UK, may be taxable in the UK. Such a provision means that it does not yet determine where the income will ultimately be taxed, but grants tax administrations powers to tax.

In fact, that provision indicates that the State of origin has the right to tax the income in question, whether or not that income will be taxable In the second country (state of residence).

Such competence/right to tax is therefore not exclusive in the sense that taxation will occur only in the country of origin (in the UK) or only in the country of residence (in Poland). Consequently, in the legal state in force to the end 2019 the remuneration obtained by a natural person for acting as director in a company established in the United Kingdom may be taxable, on a specified basis under Article 15 The Convention, both in the UK and in Poland.

At the same time, under the Polish law on income tax on individuals [2] in principle, the so-called ‘progress exemption method’, as defined under Article 22(2) points (b) and (c) of the abovementioned Convention in conjunction with Article 27(8) the Personal Income Tax Act, However, it was not directly applicable to the source of revenue, which is revenue from acting as Director in LTD. This was due to the fact that the principal's salary was within the scope of the provision of Article 22(2) points (a) (b) and (c) of the UPO Agreement:

For Poland, double taxation is avoided as follows:

If a person resident or established in Poland achieves income which, in accordance with the provisions of this Convention, is taxable in the United Kingdom, Poland shall exempt such income from taxation subject to paragraph (b) of this paragraph.

Indicated Article 22(2) Point (a) of the UPO Agreement authorising the exemption of income from taxation applies only to taxable income in the United Kingdom. Article 15 The Polish-British UPO agreement does not explicitly indicate that income will be taxed in the UK, it merely indicates that “it can be taxed In the second State’.

Despite such wording of the provision, which leaves some interpretational doubts, Poland has developed an interpretative line, according to which the income obtained for the performance of functions The Director of LTD is exempt from taxation.[3]

With these interpretations there are still doubts as to the taxable rate used in this provision and its impact on the possibility of an exemption resulting from Article 22(2) point (a) of the Convention in relation to Article 15 Convention. However, an analysis of the application of these provisions to the end 2019 points out that in most cases taxpayers used this interpretative line allowing to treat the principal's remuneration as exempt from taxation in Poland, and tax authorities accepted this practice.

Taxation of revenue of directors of UK companies since January 2020

According to the MLI Convention concluded between the Republic of Poland and the United Kingdom of Great Britain and Northern Ireland, the provisions of which have been binding on both countries for a year 2020, where a natural person resident in Poland obtains income or profits which, in accordance with the provisions of the Convention, may be taxed in the United Kingdom, Poland shall authorise a deduction from the tax on income or property gains of that person, an amount equal to the tax on income or property gains paid in the United Kingdom. Thus, the provisions of the UPO Agreement which granted the possibility of exempting income from that source (Article 22(2) point (a) of the UPO Agreement has been replaced by Article 5(6) The MLI Convention).

This provision leaves no doubt that the remuneration received by the Polish resident for acting as a director in LTD is taxable in Poland using the proportional deduction method.

Thus, the Director of LTD is obliged to take into account in the annual statement of PIT the remuneration for acting as Director in LTD and the calculation of the tax due using the proportional credit method.

According to the method indicated on the tax calculated in Poland, the tax paid in the UK is deducted, with the deduction of tax paid abroad in the taxpayer's country of residence limited to that part of the tax which corresponds to income which can be taxed in the source country (i.e. abroad).

It should also be noted that, according to local tax law, there is a relatively high tax-free amount in the United Kingdom, and therefore there may often be a situation where, due to the non-excess of the tax-free amount, which is settled in Poland, there will not be a value that the taxpayer could charge for the tax due in Poland. In such cases, the Polish resident will be obliged to pay the tax based on the provisions of Polish tax law on the total income earned.

In conclusion, the comparison of the current legal situation with the one in force until the end of last year should be taken with caution to determine the tax consequences of operating in the form of LTD in the UK.

Offers and information on the possibility of handling UK companies are still available on the network, but most of them have not been updated to the indicated changes in taxation under the rules applicable after the implementation of the MLI Convention.

UK companies are still a form of activity worth attention, but the decision to start such activities should be preceded by a reliable analysis, allowing for a detailed assessment of the tax consequences of such a solution.

Author:

Leszek Dutkiewicz, partner Russell Bedford Poland. Associated with the company from 2011. Director of RBP office in Katowice. In years 2008 – 2011 worked for leading consulting companies (Ernst&Young, KPMG, BDO) providing tax advisory services.

He specializes in tax and economic law, primarily in international tax law, tax proceedings, VAT and transaction prices. Author of a publication on tax, civil and international law issues. Lecturer in tax law training. He has legal education, in 2008 graduated from the Faculty of Law and Administration of the Jagiellonian University.