Recently, a draft amendment to the acts on income taxes was published, including the act on personal income tax (Act of July 6, 1991 on personal income tax, Journal of Laws of 2020, item 1426), dated September 15 2020 One of the most important changes made by the Government under the project is the abolition of the abolition allowance described in Art. 27 of the Act, which will significantly affect the tax settlements of foreign income earned by Polish tax residents.
The abolition allowance was introduced in 2008 in response to the need to level the tax situation of citizens who earn their income outside our country, but at the same time are still Polish tax residents. In such a situation, taxpayers, depending on the provisions contained in the agreement on the avoidance of double taxation with a given country, settle their income in two ways:
• The method of proportional deduction
• The method of exclusion with progression
The method of exemption with progression releases the taxpayer from the obligation to pay tax on foreign income in Poland. Income earned abroad is not the tax base in Poland. However, the obtained income is used to determine the income tax rate for other income earned in our country.
Example
Income achieved in Poland: PLN 18,000
Foreign income: PLN 27,000
Hypothetical tax payable in Poland: PLN 7,124.88 (45,000 * 17% -525.12)
Tax rate on income obtained in Poland: 15.80%
Tax payable in Poland: PLN 2,844
The second method of avoiding double taxation is the method of proportional deduction. It consists in taxing in Poland income obtained abroad according to the tax scale. The tax payable in Poland is reduced by the tax paid outside the country. The possibility of tax deduction applies only to the amount of tax proportionally corresponding to the income obtained in a foreign country.
Example
Income achieved in Poland: PLN 27,000
Foreign income: PLN 18,000
Tax paid in a foreign country: PLN 3,420
Hypothetical tax payable in Poland: PLN 7,124.88 (45,000 * 17% -525.12)
Foreign tax deductible in Poland: PLN 2,849.95 (7,124.88 * 18,000 / 45,000)
Tax payable in Poland: 7,124.88-2,849.95 PLN = 4,275 PLN
Taxpayers earning income in a country with which Poland has signed a double taxation avoidance agreement containing a method of proportional deduction as a method of settlement, must pay additional tax on income obtained outside Poland, if the value of the tax paid abroad is lower than the tax due in Poland.
The method of exemption with progression is generally more advantageous for the taxpayer, as it releases him from the obligation to pay tax on income obtained in a foreign country.
The abolition allowance was introduced in order to level the tax situation of taxpayers resulting from the application of various methods of avoiding double taxation. It allows for exemption from taxation of income obtained outside Poland, regardless of the method of avoiding double taxation used in the relevant international agreement. The abolition of the tax relief will introduce an unfavorable situation for taxpayers who, when settling foreign income, are obliged to apply the proportional deduction method, as a result of which they will be obliged to pay the tax difference in Poland on income obtained abroad.
At the moment, the introduction of the new regulations will primarily affect the foreign income of Polish tax residents obtained, among others, in Belgium, the Netherlands, Great Britain, the United States or Australia.
The proposed changes, according to the information provided by the government, would enter into force on 1 January 2021.