Rafał Frączyk from EY explains that this year Poles working, for example, in Great Britain or the Netherlands will benefit from the full amount of the abolition allowance, but in the settlement for 2021 it will be limited. In his opinion, many taxpayers may permanently transfer their tax residence abroad.
/ Wojciech Stróżyk /Reporter
It is about the amendment to the abolition allowance, effective from January 1, 2021, which significantly limits it.
– The full value of the abolition allowance can still be deducted in the tax return for 2020, submitted by the end of April this year. This is because the change concerns income earned after January 1, 2021. As a result of the changes, it can be expected that many taxpayers will decide to permanently transfer their tax residence abroad – says Rafał Frączyk, tax advisor, project manager in the EY Polska tax advisory department.
As he recalled, the abolition relief applies to tax residents in Poland, i.e. people who have the so-called a center of personal (e.g. immediate family) or economic (e.g. business) interests, or staying in Poland for more than 183 days during a calendar year and at the same time earning and taxing part or all of their income abroad.
Frączyk explained that, in accordance with the applicable law, there are two methods to avoid taxing income in two countries at the same time – either by deducting tax paid abroad in the Polish return (proportional deduction method) or by exempting income earned abroad from taxation in exclusions with progression). In the latter case, however, the amount of income earned will affect the tax rate resulting from the 17-32% progressive scale.
Which of the above-mentioned methods is applicable in a specific case is determined by the double taxation avoidance agreement concluded by Poland with a given country.
– Due to the method of calculation, the latter method is more favorable for the taxpayer – especially if the tax paid abroad is for various reasons lower than in Poland – explains the tax advisor.
– The purpose of the abolition allowance is to compensate for the differences between the two methods so that people who earn an income abroad, when the proportional deduction method applies, do not have to pay extra tax in Poland. It allows for an additional deduction from input tax in Poland, said the expert.
The change introduced on January 1, 2021 limits the abolition allowance to PLN 1,360 per year. According to Frączyk, in practice this means that in many cases Polish taxpayers will have to pay tax to the Polish tax office on their income earned and taxed abroad.
– The change will especially affect people who, being Polish tax residents, e.g. due to the fact that their closest family still lives in Poland, work, for example, in the United Kingdom, the Netherlands, Belgium, the USA, Russia, Norway, Denmark, or another country, in the case of which the double taxation agreement provides for the so-called proportional credit method – EY representative calculated.
– People working in countries with which Poland has not signed a double taxation avoidance agreement at all, e.g. in Brazil, can also lose – Frączyk believes.
As he informed, the change will not affect people working, among others in Germany, Spain, France or Italy, because in the case of these countries, the avoidance of double taxation consists in exempting taxable income in Poland. He emphasized that the unlimited abolition allowance can still be settled by people who work outside the country’s land territory, e.g. seafarers.
When asked about the practical aspects of limiting the relief, the tax advisor explained that if the proportional deduction method is applied, taxpayers will have to prove all income earned abroad and add it to the income taxed in Poland.
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– If a tax has been paid abroad, it will be able to be deducted from the Polish tax. However, if the tax charged abroad for various reasons is lower than the Polish tax, e.g. due to lower tax rates, a higher tax-free amount or additional allowances and deductions abroad, and the difference exceeds the limit of PLN 1,360, you will have to pay an additional tax in Poland – explained Frączyk.
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