Limited abolition relief – how it will affect tax liabilities for 2022?

Polski

Polish tax residents who, in 2022, earned revenues in countries with which the proportional deduction method is applied under double tax agreements, in their PIT filed in 2023, will tax income earned from these countries in Poland and pay tax according to the scale (beyond the amount to which the abolition relief is no longer entitled).

How to properly apply the abolition relief when accounting for income tax on personal income earned abroad is presented in the Minister of Finance's tax explanations of August 10, 2021.

Who will lose due to changes in the abolition relief?

According to Article 27g of the PIT Law, the abolition relief will be available to all taxpayers, but the amount of the income tax deduction cannot exceed PLN 1,360. In practice, this means that anyone with income in excess of PLN 30,000 will have to pay tax in Poland at a rate of 12%, and after exceeding PLN 120,000, as much as 32%.

Implementation of the limit of the abolition relief applies to taxpayers whose foreign income is earned from sources such as: employment relationship, service relationship, contract work, cooperative employment relationship, business activity and activities performed personally or from property rights in the field of copyrights and related rights as defined by separate regulations, from artistic, literary, scientific, educational and journalistic activities performed outside the territory of the Republic of Poland, except income (revenue) earned from using or disposing of these rights.

Who will not be affected by the changes to the abolition relief?

The unfavorable changes did not apply to seafarers (who perform work outside the land territory of countries), for whom the legislator decided to keep the abolition relief under the existing rules, and thus the possibility of effective exemption from taxation of foreign income in Poland, provided that the tax on such income was paid abroad.

What are the methods of taxing foreign labor income?

For foreign income applies the regulations contained in the so-called double taxation agreements providing for exemption with progression and proportional deduction.

For countries where Poland has a double taxation agreement providing for the method of exclusion with progression (e.g. Albania, the Czech Republic, Cyprus, France, Germany, Italy, Luxembourg, Latvia, Romania, Switzerland, Sweden, Turkey, Ukraine), the taxpayer will not pay tax in Poland on foreign income, but must show it in the PIT return, which may affect the effective tax rate. This is the most favorable solution for taxpayers.

On the other hand, if the so-called deduction method applies under the agreement, tax paid abroad can be deducted from Polish tax. This method of avoiding double taxation is affected by unfavorable changes in the possibility of using the so-called abolition relief – an additional deduction for taxpayers.

The use of the proportional deduction agreement applies to countries such as: Saudi Arabia, Armenia, Australia, Austria (as of January 1, 2019), Belgium (as of 01.01.2021), Chile, Denmark (as of 01.01.2021), Egypt, Finland (as of 01.01.2020), Georgia, Netherlands, India, Iran, Ireland (as of 01. 01.2020), Israel (from 01.01.2020), Japan (from 01.01.2020), Canada (from 01.01.2021), Qatar, Kazakhstan, Kyrgyzstan, South Korea, Lithuania (from 01.01.2020), Macedonia, Malaysia, Moldova, Norway (from 01. 01.2021), New Zealand (from 01.01.2020), Portugal (from 01.01.2020), Russia, Slovakia (from 01.01.2020), Slovenia (from 01.01.2019), Singapore, Syria, Taiwan, Tajikistan, USA, Uzbekistan, United Kingdom (from 01. 01.2020), United Arab Emirates (from 01.01.2021), Greece, Hungary, Jordan, Pakistan (from 01.01.2022), Estonia, Spain, Thailand (from 01.01.2023), Bulgaria, China (from 01.01.2024).

How the limitation of the abolition relief will affect the taxation of income earned in countries with which Poland has no double taxation agreements?

The proportional deduction method, i.e. the settlement method affected by the unfavorable changes involving the reduction of the abolition relief, is applied to foreign income earned in countries with which Poland has not signed double taxation agreements (e.g. Argentina, Bahamas, Brazil, Dominican Republic, Ecuador, Haiti, Cambodia, Cuba, Liechtenstein, Madagascar, Maldives, Monaco, Nigeria, Panama, San Marino, Seychelles, Venezuela).

MLI changes rules for foreign income settlement

Poland has ratified the MLI convention, which changes the method of avoiding double taxation into the method of proportional deduction in a large number of agreements. As a consequence, it is envisaged to introduce this less favorable method in an increasing number of contracts. 

The changes have already been felt or will be noticed by Polish tax residents earning, among others, in countries such as (we have already mentioned them above in the section of the method of deduction):

The list of countries is likely to change in the future, as more countries may ratify the MLI convention, although accession does not always mean changing the method of avoiding double taxation.

What does this mean for taxpayers?

The changes in the abolition relief differentiate the taxation of income depending on the place of income. Polish tax residents working e.g. in Germany, France, the Czech Republic will be able to use the exemption with progression method. On the other hand, those working in the United Kingdom, the Netherlands, Slovakia, Belgium Ireland and Greece will tax their income from these countries in Poland and pay additional tax according to the scale (after exceeding the amount to which the abolition relief is no longer entitled).

In addition, it's worth checking which countries have ratified the MLI convention changing the method of avoiding double taxation to know how law updates limiting the abolition relief will affect the taxation of foreign income.