Foreign rental property income – tax treatment and practical tax pitfalls

Private Rental Income – Basic Rules

Income derived from private rental activities, whether relating to property located in Poland or abroad, is currently subject exclusively to lump-sum taxation on recorded revenues ("lump-sum tax"). This means that taxpayers cannot choose progressive taxation or the flat-rate tax regime for this source of income. While this simplifies the taxation mechanism itself, it simultaneously excludes the possibility of deducting tax costs such as depreciation or renovation expenses. The applicable tax rates remain unchanged and amount to:

• 8.5% on annual rental income up to PLN 100,000,
• 12.5% on the excess above PLN 100,000.

The PLN 100,000 threshold applies jointly to all private rental income attributable to a taxpayer.

Rental of Property Located Abroad – Where Does the Tax Liability Arise?

Polish tax residents are subject to taxation in Poland on their worldwide income. Consequently, income derived from rental of foreign real estate must also be analysed under Polish tax regulations. At the same time, income from real estate is generally taxable in the country where the property is located. Therefore, the mere fact that tax has been paid abroad does not automatically mean that the income is tax-neutral in Poland. The final tax treatment depends on the provisions of the relevant double taxation treaty and on whether, and to what extent, that treaty has been modified by the MLI Convention.

Importance of the Double Tax Relief Method

The method used to eliminate double taxation has the greatest practical impact on the final tax position of the taxpayer. Where the exemption with progression method applies, foreign income is not taxed in Poland again but may affect the taxation of other domestic income. Italy may be cited as an example of a jurisdiction where this method applies. In practice, this means that rental income from Italian property remains exempt from Polish taxation. However, it may still influence the tax treatment of other private rental income taxed using the lump-sum regime. Where the ordinary tax credit method applies, foreign income remains taxable in Poland, while tax paid abroad may be credited against Polish tax up to the relevant limit. This applies, among others, to Spain, where MLI-related changes are particularly important, and Austria, where the less favourable tax credit method has applied since 2019. In practice, this method is more burdensome and more frequently results in additional tax payable in Poland.

Exemption with Progression Method – Specific Implications Under the Lump-Sum Tax Regime

Particular attention should be paid to the exemption with progression method where private rental income is taxed under the lump-sum regime. If a Polish tax resident earns both domestic rental income and rental income from foreign property located in a jurisdiction covered by this method, foreign income may affect the effective lump-sum tax rate applicable to domestic rental income. As a result, although foreign rental income itself is not taxable in Poland, it may increase the tax rate applicable to domestic rental income where total rental receipts exceed PLN 100,000. Consequently, a taxpayer may end up paying more tax on domestic rental income than would have been the case if no foreign rental income had been earned. Where the combined foreign and domestic rental income does not exceed the relevant threshold, the impact of this mechanism is generally limited. In practice, foreign rental income covered by the exemption with progression method should be reported in the PIT-28 annual tax return in the section dedicated to income exempt under double taxation treaties. If such income affects the application of the higher lump-sum tax rate to income taxable in Poland, the taxpayer should also report the relevant tax adjustment calculated in accordance with the applicable provisions of Polish tax law.

Ordinary Tax Credit Method – Practical Consequences

Where the ordinary tax credit method applies, foreign rental income must be reported in the Polish annual tax return. Tax paid abroad may be credited against Polish lump-sum tax, but only up to the applicable limit. As a result, even where tax has been correctly paid abroad, the taxpayer may still be required to pay additional tax in Poland. Importantly, the tax credit mechanism may be used not only in the annual tax return but also in the calculation of current lump-sum tax payments during the year. This aspect is frequently overlooked in practice and often results in tax arrears together with interest.

Advance Tax Payments

Private rental income must be settled on an ongoing basis throughout the year.
Taxpayers are required to make monthly or quarterly lump-sum tax payments. The payment frequency selected for a given year should remain consistent for all sources of income taxed under the lump-sum regime. In practice, where a taxpayer also derives other income subject to lump-sum taxation, the payment schedule for private rental income cannot be selected independently. Correct determination of advance tax payments further requires identifying the actual date on which rental income is received. Whether foreign rental income is received monthly, quarterly or according to another schedule determines when the tax obligation arises in Poland.

Annual Return – PIT-28

Following the end of the tax year, private rental income, including foreign rental income, must be reported in the PIT-28 annual tax return. Where the ordinary tax credit method applies, foreign income must be disclosed and foreign tax paid must be taken into account. Where the exemption with progression method applies, foreign income remains exempt from taxation in Poland but may still be relevant for determining the effective lump-sum tax rate applicable to domestic rental income. Therefore, filing a PIT-28 return requires more than simply transferring figures from local tax filings. It also requires proper identification of the applicable double tax relief method and a correct assessment of its Polish tax consequences. Taxpayers should also bear in mind that the way foreign income is reported in PIT-28 differs depending on the applicable method of avoiding double taxation. Practical aspects of reporting income covered by the exemption with progression method have been discussed above.

Most Common Tax Pitfalls

Foreign rental income remains one of the more problematic areas of personal income taxation. One of the most common mistakes stems from the assumption that paying tax abroad fully settles the taxpayer’s obligations. In reality, Polish tax residents are often still required to account for such income in Poland. Another frequent issue concerns failure to consider the effect of the MLI Convention on changes to the double taxation relief method, particularly in the case of property located in Spain. Many taxpayers are surprised to discover that they are required to pay additional tax and interest in Poland despite having correctly settled their tax obligations in the country where the property is located.

PwC Comment

The taxation of income from foreign real estate requires a much broader analysis than domestic rental income. In addition to Polish tax regulations, it is necessary to consider the provisions of the relevant double taxation treaty and any modifications resulting from the MLI Convention. In practice, the greatest challenges often arise not during the annual reporting process itself, but when determining the ongoing Polish tax consequences, particularly where the ordinary tax credit method applies and foreign tax must already be taken into account when calculating current lump-sum tax payments.
This is precisely the area where most errors, tax arrears and interest liabilities arise.