Imposing taxes on working abroad in 2021 after reducing the cancellation allowance

Moving to another country and working abroad, as long as it is completely temporary and does not particularly affect the employee’s relationship with Poland (eg permanent place of residence, family, husband, wife, children, residence), should not entail negative consequences. However, it must be emphasized that the longer the stay, the lower the personal and economic relations with Poland (for example, by giving up a lease in Poland or selling an apartment), the higher the risk of the employee remaining abroad. Be related to additional duties in the country where the work is currently being performed

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In particular, you should bear in mind the relevant issuesWith the tax residence of employees, i.e. the potential obligation to declare all their global income in the country in which they are currently residing, the emergence of an obligation to register in the local tax and insurance system, including the need to pay taxes and pay social services contributions in the state in which the employee works and the obligation to register Residence and work in the competent authorities of a particular country. This is especially important in the case of working for a foreign employer and a longer stay abroad.

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Limiting Cancellation Allowance – Tax Consequences

After changes to the regulations in January, it may turn out that many people who work abroad, if their tax residence remains in Poland all the time, will have to pay additional taxes. The government initially wanted the relief to be abolished entirely. However, Sim decided to limit it to the amount of 1,360 PLN. The Ministry of Finance explained that such a measure was necessary because negative consequences were observed related to the use of the tax exemption for an aggressive tax policy, with the use of the provisions of the double taxation avoidance agreements.

See case law in LEX: Allowance for cancellation and payment of tax abroad>

As confirmed by Małgorzata Trzęsimiech, Tax Consultant, Supervisor at Mazars Tax Advisory Department, with the ratification of the MLI, Poland has announced that it will strive to standardize the method of eliminating double taxation by introducing the proportional deduction method in tax agreements and replacing the previously used method of exemption with Progress on applicable contracts.

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– However, the proposed limit will not be sufficient for Poles who receive income from work, for example from the Netherlands or Ireland (For example, from the countries with which Poland has a DTT that provides for the method of proportional deduction) – Unfortunately, in most cases, they will be required to pay a higher tax in Poland for 2021 compared to the tax that will be paid by them in Poland for 2020. – indicates To Małgorzata Trzęsimiech.

– The introduction of a significant limitation on the maximum amount of the cancellation allowance to PLN 1,360 may affect Polish tax residents who receive income in countries with which Poland has agreements on the avoidance of double taxation based on the so-called proportional deduction – explains Alexander Del, attorney at the Office of Law firm Ożóg Tomczykowski.

Read in LEX: 2021 tax changes guide>

The method of proportional deduction and avoidance of double taxation

The proportional discount method, in respect of income obtained after January 1, 2021, will in turn be used in contracts that Poland has with, among others, Australia, Austria, Belgium, Denmark, Finland, the Netherlands, Ireland, Israel, Japan, Canada, Lithuania, Norway, New Zealand, Portugal, Russia, Slovakia, the United States and Britain Great and the United Arab Emirates.

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As Alexander Dale explains, The avoidance of double taxation in the form of a proportional deduction is the possibility of reducing the tax on foreign income payable in Poland by the amount of tax paid abroad. Therefore, if the amount of foreign tax paid exceeds the amount of tax payable in Poland, then the Polish tax is not payable. However, if the amount of foreign tax paid is less than that payable in Poland (for example, due to a higher tax-exempt amount, a lower tax rate or the absence of taxable income tax as in the UAE), the difference must be paid to Calculation of the Polish tax authorities. As the above resulted in less favorable treatment of persons earning income in countries that apply pro rata deductions than those earning income in countries that use the exemption with progression, a cancellation allowance was introduced, the amount of which was to offset the potential increase in taxes payable in Poland resulting from the proportional discount method.

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The solution was to resign from the Polish residence

Thus, determining the amount of the cancellation allowance will affect only persons who:

1. The tax residence is defined as Polish,
2. Foreign income is subject to the double taxation avoidance method in the form of a proportional deduction,
3. The foreign tax is less than the tax payable by default in Poland,
4. The benefit arising from the application of the cancellation allowance under the old rules exceeds 1,360 PLN.

In order not to pay taxes in Poland, you have to give up your residence in Poland.

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