The draft amendment to tax acts published on July 26, 2021 (including the act on flat-rate income tax on certain income earned by natural persons and the PIT Act), which is part of the Polish Deal program, announces a significant change in the principles of taxation of income from rental and lease earned outside of economic activity (so-called private rental).
From 2022, the only acceptable form of taxation of such revenues is to be a lump sum on recorded revenues - excluding the possibility of applying the tax scale to such revenues and the right to deduct the costs of depreciation of residential premises. Lump sum rates on rental income will not change compared to 2021 and will continue to amount to 8,5% of the income up to the amount of 100,000 PLN and 12,5% of the surplus of revenues over 100,000 PLN.
Limiting the choice of the form of private rental taxation and obligatory taxation of these revenues with a lump sum may turn out to be very important for people earning money on renting real estate (especially if they incur high costs related to the subject of the rental).
The settlement of rental income obtained abroad will depend on the country in which the real estate is located and, consequently, which method of avoiding double taxation (i.e. exemption with progression or proportional deduction) will be applicable.
At this point, it is worth mentioning the changes resulting from the ratification of the MLI (Multilateral convention to implement tax treaty-related measures to prevent base erosion and profit shifting) by subsequent countries, thanks to which, in the case of subsequent jurisdictions, the basis method of avoiding double taxation becomes as a rule, the proportional deduction method is usually less favorable.
Settlement of rental income obtained outside Poland on general terms
If the double taxation avoidance agreement provides for the method of exemption with progression, although, as a rule, the taxpayer will not pay the tax in Poland on the foreign rental, the taxpayer must show it in the PIT declaration, which may affect the effective tax rate on domestic income.
However, in the event that the agreement on avoidance of double taxation provides for the so-called deduction method, a Polish resident must always show foreign income in Poland and pay tax on it. What taxpayer can do is deduct (in proportion) the tax paid abroad.
How do lump sums settle foreign rental?
If a Polish tax resident obtains rental income in Poland taxed with a flat rate on recorded income and additionally rents real estate located abroad (in a country for which the exemption with progression method applies), foreign income does not affect the flat rate in Poland. Taxpayer is also not obliged to prove such income in PIT-28 submitted in Poland.
However, if a Polish tax resident obtains rental income in a country for which the pro-rata deduction method applies, taxpayer must show the foreign income in the PIT-28 declaration and pay tax on them. The tax paid abroad, which is deductible from the lump sum, should be shown in item 148 PIT-28 statements.
How will the regulations introduced by the Polish Deal affect the settlement of revenues from foreign rental?
According to the assumptions of the Polish Deal project, people who obtain income from rental and lease obtained outside of economic activity (the so-called private rental), from 2022, will in principle, settle them in the form of a lump sum without the right to use the tax scale. If such income is obtained in countries for which the exemption with progression method applies, the rental, as a rule will not generate additional tax costs in Poland.
If, on the other hand, rental income will be obtained in countries for which the proportional deduction method should be applied, taxpayers will be required to establish a lump sum on revenues in the amount of 8,5% or 12,5% (without the possibility of recognizing tax deductible costs or reducing revenues by depreciation costs) and deduct the tax paid abroad from the so calculated lump sum.
The above may lead to situations in which the taxpayer, as a Polish tax resident, will be obliged to bear the costs of the flat-rate tax in Poland, even if in reality he has little rental income (due to high tax deductible costs) and does not even have to pay tax on such tax income.
In our opinion, the scope of the proposed changes will significantly limit the range of available solutions for taxing rental income. It would be good if the circumstances related to the rental of foreign real estate were already preceded by a thorough analysis of the potential charges in this respect.