The obligation of the Poles to calculate income earned in the territory of Great Britain is influenced mainly by the issue of tax residency and the relevant provisions of the agreement between the Republic of Poland and the United Kingdom of Great Britain and Northern Ireland on the avoidance of double taxation and the prevention of tax evasion in the area of income gains and property (hereinafter referred to as the “DTT Agreement”) “).
An important issue of the residence tax
In the case where the taxpayer is a person with unlimited tax liability in Poland (the so-called Polish tax resident), he is obligated to declare all of his income in Poland, including for example taxable income in the United Kingdom. According to the principle of unlimited tax liability, a Polish tax resident is subject to taxes in his country of residence (Poland), regardless of whether the income comes from Poland or abroad.
According to the provisions of the Polish Personal Income Tax Act, a person is considered a tax resident in Poland, Which:
- It has a center of personal or economic interests (the center of vital interests) in the territory of the Republic of Poland, or
- It stays on the territory of the Republic of Poland for more than 183 days in the tax year.
Fulfilling any of these conditions means that a natural person is legally recognized as a Polish resident and is therefore subject to unlimited tax liability in Poland. Failure to fulfill the above conditions leads to his recognition as a person with limited tax liability in Poland, that is, a non-tax resident. The limited tax liability consists in making the income produced on the territory of the Republic of Poland compulsory for tax. Limited tax liability institution refers to the so-called source rules. Therefore, a non-tax resident is not subject to any tax liability on account of taxable income in the territory of Great Britain. It should be emphasized that determining the tax status of the sending person / working abroad is critical for resolving tax liabilities and requires a separate analysis of the individual situation.
The determination of the cancellation allowance does not apply to income from 2020 >>
Since January, those working abroad may pay a higher tax >>
Telework outside of Poland may mean higher taxes >>
Income from work in Great Britain
With regard to the income obtained, among other things from the employment contract, in the case where the person is a Polish tax resident, the DTT agreement provides for the so-called method of closing with progress (Article 14 in conjunction with Article 22 (2) of the DTT). The method of exemption with progress is the fact that income earned outside the country of residence of the taxpayer is excluded in his country of residence from the tax base, but is taken into account when determining the tax rate on the residual income earned by the taxpayer. In such a situation, the income is not subject to tax in Poland, but nevertheless has an effect on the amount of tax on Polish income.
MLI Agreement and UK Income Accounting Method
The Multilateral Tax Agreement (Multilateral Agreement to Implement Measures Related to the Tax Treaty to Prevent Base Erosion and Cover Profits, the MLI Agreement for short) is an agreement signed on June 7, 2017 by more than 100 countries. In the case of Poland, it assumes, inter alia, a change in the agreements concluded by our country regarding the avoidance of double taxation from the current method of exclusion (exemption) with an advance to the proportional credit method. On July 1, 2018, the agreement came into effect in five countries, including Poland.
On January 1, 2020, the MLI agreement changed the content of art. 22 seconds. 2 lit. A of the DTT Agreement and introduced a principle whereby the proportional deduction method would apply to taxable income in the UK for Polish tax residents. It consists in the fact that income earned abroad is subject to tax in Poland, but the tax paid abroad is deducted from the tax owed. This deduction is only possible up to an amount of tax that is proportional to the taxable income of Great Britain.
For Polish tax residents with taxable income in the UK only, the change from the progressive exemption method to the proportional deduction method requires the submission of an annual tax return. However, if earned income is taxed in 2020, this will not affect the amount of tax. Taxpayers can benefit from the so-called penalty relief referred to in Article 27 of the pit law. You are allowed to deduct an amount from the tax that represents the difference between the tax amount calculated according to the proportional deduction method and the tax amount calculated for a specific tax year using the exemption method with the advancement of this income. The essence of exemption from cancellation was to equalize the status of taxpayers, that is, those who benefit from the so-called proportional deduction method and the so-called closure methods with progress.
Due to the amendment of the Comprehensive Income Tax Law, the application of tax exemption will be restricted. For income earned from January 1, 2021, the deduction for cancellation allowance may not exceed the amount that reduces the tax, that is, PLN 1360. Reducing the possibility of deducting the cancellation allowance will increase the amount of tax liability in Poland for Polish tax residents earning taxable income in the United Kingdom.
It is also worth noting that according to the provisions of the DTT agreement, under certain circumstances, a taxpayer who works in the UK may only be taxed in Poland. This is done under the following conditions:
- Work abroad does not last more than 183 days in the twelve-month period that begins or ends in a particular tax year and,
- The salary is paid by or on behalf of an employer who is not a resident or incorporated in the United Kingdom, and
- The foundation owned by the UK employer does not bear the salary.
Settlement of taxes in Poland
From 1 January 2021, Great Britain is treated as a non-member state of the European Union, and therefore the provisions of the Income Tax Act apply to it, which refer to relations with third countries, and not – as it was before – with the European Union. This has an effect on:
- Mutual settlement With the spouse in Poland, after certain conditions are fulfilled, the joint settlement can also be used by the spouses residing for tax purposes in the member states of the European Union, the European Economic Area or Switzerland, or one of them is subject to unlimited tax liability in Poland and the other residing for tax purposes in a member state In the European Economic Area other than Poland or Switzerland;
- Preferential Taxes for Single Parents – In Poland, under certain circumstances, taxes as a single parent may benefit a taxpayer resident for tax purposes in an EU member state or EEA other than Poland or Switzerland;
- Charitable Donations – Donations made to nonprofits in the UK will not be deducted from income;
- The Housing Exemption à will not apply to real estate located in Great Britain;
- Deduction of health and social insurance contributions – It will not be possible to deduct the social and health contributions in the UK.
Brexit and social insurance
In light of the provisions of the Law on the Social Insurance System, the insurance obligation covers, inter alia, the following: People who work for Polish employers on the basis of the provisions of the Polish Labor Law. This also applies to people who are authorized to perform their work duties in another country on the basis of a Polish employment contract. If it is a country that does not belong to the European Union or the European Economic Area, social security is dealt with in bilateral international agreements. These agreements specify the state’s social security legislation that applies to your situation. It is likely that no such agreement will be concluded, and the absence of it may mean that social security contributions will be due in both countries and it will not be possible to effectively eliminate the dual contributions. No social security agreement has been concluded between the United Kingdom and Poland, and until now European Union regulations in this area have been in effect.
It is important to distinguish between the situation of people working in the UK before 1 January 2021 and that of people who will start work after that date. The situation of the first group of people is governed by the provisions of the agreement to withdraw the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community. If a certificate of social security legislation is issued for this group of persons (the so-called A1 certificate), then the European Union rules for harmonization of social security systems for the period referred to in this document can also be applied after January 1, 2021.
The status of the second group of people is regulated by the provisions of the Protocol for the Coordination of Social Security Systems, which is part of the Trade and Cooperation Agreement between the European Union and the United Kingdom. According to its provisions, it is possible to temporarily continue the application of EU rules for harmonization of social security systems in the event that a member state notifies the European Commission of this intention within the required deadline.
Sebastian Cowza, the supervisor in the tax advisory department of the PIT team at KPMG in Poland
Karolina Demska is a consultant in the tax advisory department of the PIT team at KPMG in Poland