Limited abolition relief – how it will affect tax liabilities for 2024?

Polski

Polish tax residents who earned income in 2024 in countries with which the proportional deduction method is applied under double taxation treaties or with no such treaty has been signed, will report income from these countries in Poland in their PIT filed in 2025 and pay tax on them. As a rule, however, they will be able to deduct tax paid abroad from the tax due in Poland (up to a specified limit).

The method of proportional deduction is less advantageous for taxpayers than the method of avoiding double taxation applicable in some other countries - the so-called exemption with progression. For this reason, the legislator introduced the possibility of using a special relief - the abolition relief, the purpose of which was to equalize the final tax burdens of people earning income in countries with different methods of avoiding double taxation.

However, since 2021, the amount of the abolition relief is limited. 

The method of correct application of the abolition relief when settling income tax on income of individuals earned abroad was presented in the tax explanations of the Ministry of Finance of 10 August 2021.

Who loses due to changes in the abolition relief?

According to the Article 27g of the Personal Income Tax Act, the abolition relief is available to all taxpayers, but the amount of the deduction from income tax cannot exceed PLN 1,360. In practice, this means that anyone who earns income exceeding PLN 30,000 must pay tax in Poland at the rate of 12%, and after exceeding PLN 120,000 - 32%

The introduction of the abolition relief limit applies to taxpayers whose foreign income is derived from sources such as: employment relationship, a service relationship, outwork, a cooperative employment relationship, business activity and activity performed personally or from property rights in the scope of copyright and related rights within the meaning of separate provisions, from artistic, literary, scientific, educational and journalistic activity performed outside the territory of the Republic of Poland, with the exception of income (revenue) obtained from the use or disposal of these rights.

Who is not 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 previous 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 employment 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 exemption with progression (e.g. Albania, the Czech Republic, Cyprus, France, Germany, Italy, Luxembourg, Latvia, 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 proportional 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 method 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 01.01.2021), 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, Jordan, Pakistan (from 01.01.2022), Estonia, Spain, Thailand (from 01.01.2023), Bulgaria, China (from 01.01.2024), Romania (from 01.01.2024).

How the limitation of the abolition relief affects 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:

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 limit on the amount of the abolition relief affects the different amount of tax due in Poland depending on the country in which the taxpayer obtained foreign 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 Austria, 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 tax scale (using the abolition relief deduction in a limited amount). Polish tax residents working or planning to work abroad should always conduct a thorough analysis of the regulations.

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.