Poland to end tax relief on income earned abroad

Poland’s finance ministry has announced that it will abolish a tax relief that had previously allowed some Polish residents to avoid paying tax on earnings from working abroad.

Until 2019, those who worked abroad but remained tax residents in Poland – spending a maximum of 183 days outside the country – had not paid any tax on foreign income.

Their foreign earnings mattered only in so far as to determine the effective tax rate which should be applied to calculate taxes on potential domestic income. But if they had no income Poland, no tax was paid.

Last year, as a result of new international treaties, this system of tax exemption was replaced by a “credit method”. This means that for a list of countries which have adopted the treaties, Polish tax residents pay tax both in Poland and abroad, but are able to deduct their foreign tax from their tax dues in Poland.

Poland, however, allowed Polish tax residence to use a tax relief (ulga abolicyjna) which meant that, so long as they made no income in Poland, they would not pay any tax on foreign earnings abroad. Now, the government has announced that the relief will be abolished from the start of 2021.

The new regulation will affect an estimated 67,000 Polish tax residence who have benefited from the relief up till now. There are worries that the new rules could persuade some of them to emigrate from Poland for good, or to take up work in the grey sector, reports NaTemat.

The tax relief scheme had cost Poland’s budget 260 million zloty (€58 million) per year. According to deputy finance minister Jan Sarnowski, 80% of that comes from untaxed income in EU tax havens, including the Netherlands, Luxembourg and Cyprus, reports the Polish Press Agency.

Under current rules, Poles can earn up to 3,089 zloty (€695, tax-free allowance) a year abroad without paying any tax in Poland. The ministry of finance has, however, announced that it will also raise this bar to 8,000 zloty (€1,800) annually.

According to ministry estimates, this would allow some 60% of those earning abroad – or 41,000 tax residents – to fall below the income threshold and thus still manage to avoid paying taxes in Poland.

This, however, is little consolation for those earning in countries where the tax-free allowance threshold is much higher, such as the UK, where it stands at around 60,000 zloty (€13,700) of annual earnings.

As a result of the new rules, Polish tax residents in the UK who earn below the UK threshold of 60,000 zloty but more than the new Polish threshold of 8,000 zloty will now begin to pay tax in Poland.

The new rules have been anticipated since Poland’s signing of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). This was designed to codify double-taxation rules between countries, and has been in force in Poland since 2019.

The MLI credit method has been in place since 2019 with Austria and Slovenia, since 2020 with the UK, Ireland, Finland, Israel, Japan, Lithuania, New Zealand and Slovakia, and will come into force in 2021 with Norway, Belgium, Canada, Denmark and Portugal, according to finance ministry.

The latest move follows recent criticism of Poland’s government for appearing to break electoral pledges not to raise taxes. During his recent successful re-election campaign, President Andrzej Duda was hailed as “the guarantor of no tax rises” by Prime Minister Mateusz Morawiecki.

Shortly after his victory, however, Duda signed into a law a government policy to add an additional charge on the cost of sweet and alcoholic drinks. The government argues that technically it is a “surcharge” rather than a “tax”.

Starting in January of next year, the government is planning to introduce a progressive tax on retail sales which will be levied on large shops. This was initially introduced in 2016, but suspended after the European Commission expressed worries about discrimination of larger businesses.

The European Court of Justice has since given the Polish government the go ahead, with the outcome of an appeal by the commission still pending.

Other new surcharges include a “power fee” that will raise energy bills, as well as new corporate income taxes for limited partnership companies based in Poland, reports Gazeta Wyborcza.

These come as the economic crisis induced by the coronavirus crisis has caused the government to backtrack on its planned balanced budget for 2020, which would have been the first in Poland’s post-1989 history.

Instead, Poland will actually now run its highest ever budget deficit, of 109 billion zloty (€25 billion), according to the updated budget approved by the cabinet last month.

Main image credit: Pikist

Maria Wilczek

Maria Wilczek is deputy editor of Notes from Poland. She is a regular writer for The Times, The Economist and Al Jazeera English, and has also featured in Foreign Policy, Politico Europe, The Spectator and Gazeta Wyborcza.