5 minute read 16 Sep 2021
And what if I moved my tax residence to Poland?.... Does the Polish Deal have anything to offer to persuade me?

And what if I moved my tax residence to Poland?.... Does the Polish Deal have anything to offer to persuade me?

EY Poland
By EY Poland

Multidisciplinary professional services organization - Assurance, Consulting, Tax, Strategy & Transactions

5 minute read 16 Sep 2021
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This article is available in Polish

The latest bill amending the tax laws, which is part of the Polish Deal project, is just about to be given its  first reading in the Lower House of Parliament. One of the tax developments that are most often discussed which comes as a complete surprise is a radical change to one of the solutions proposed earlier, the so-called “repatriation relief”.

Under the initial bill, it was to take the form of a deduction (like e.g. the abolition deduction/ relief). A taxpayer who satisfied the conditions laid down in the law was to be given the right to deduct 50% of the tax due for the preceding year over four consecutive years beginning with the year of their “repatriation” to Poland. Now the rules underlying the allowance have been significantly altered and the mechanism itself simplified. As a result, the allowance is now more of another PIT relief, i.e. the “allowance for taxpayers of up to 26 years of age”, available since mid-2019.

What is then the modified “repatriation relief”? Are the applicable rules laid down by the lawmaker clear? And above all, will the solution be attractive and beneficial enough to make people take a decision to relocate their tax residence back to Poland? How will the allowance work in practical terms?

“Repatriation relief” – key rules

Under the latest bill, which is now due to be discussed in the Lower House, the repatriation relief is designed as a tax exemption. It will be available to any taxpayer who did not have their tax residence in Poland over at least 3 years in the past and who chooses to relocate it back to Poland. If they meet all the additional conditions, the following types of revenue will be exempt from tax:

  • revenues from an official relationship, employment relationship, cottage work, cooperative employment relationship;
  • revenues from personal service contracts; and
  • revenues from a non-agricultural business activity (taxable progressively, at a flat rate or a reduced rate on revenues for specified occupations).  

Important! The total revenue exempt from PIT must not exceed PLN 85,528 annually. If a taxpayer claims the “exemption for taxpayers of up to 26 years of age” and the “repatriation relief”, the total revenue exempt from PIT covered by both the exemption and the allowance cannot be higher than the cited threshold, either. 

There is another annual threshold of PLN 120,000, which caps the total revenue covered by the exemption for young taxpayers of up to 26 years of age and the repatriation allowance (revenues from a business activity excluded) along with total tax deductible costs which the PIT Act sets at 50% of the amount of revenue.

The exemption will be available for offset over four consecutive tax years, and it is left to the taxpayer’s discretion when to start the allowance, i.e. in the first year after they have returned to Poland (which is generally after they have become Polish tax residents) or in the following year. Importantly, the taxpayer will be in a position to claim the exemption once only; looking ahead rather too far, the lawmaker has assumed that if a taxpayer again relocates their domicile to Poland but has claimed the “repatriation relief” before (whatever the length), they will have no opportunity to claim it again. 

Important! The “repatriation relief” will be available already at the point of assessing monthly PIT advance payments. 

Who will be eligible for the “repatriation relief”? The name is still misleading.

The solution the government has proposed generates a real benefit for taxpayers, so it may actually prove an incentive for people to get back to Poland. The word “repatriation” has been put in inverted commas because eligibility for the allowance is not restricted to Poles returning from foreign countries; the initial wording of the bill might have suggested that it was expected to benefit any foreign nationals who have never lived in Poland and would like to relocate their tax residence to Poland to pay their taxes here. Now the lawmaker has drawn up the eligible entities list to clarify who is covered and has expressly laid down the necessary criteria that a person seeking to claim the allowance must meet, namely:

  • a person holds Polish citizenship or that of a state to be found in the attachment to the law (now the member states of the European Union, the European Economic  Area, or the Swiss Confederation); and/ or
  • holds a Pole’s Card; and/ or
  • over an uninterrupted period of three years has had their domicile in the selected jurisdictions listed in the law (i.e. member states of the European Union, the EEA, the Swiss Confederation but also e.g. Australia, Japan, Canada, the UK or the US); and/ or
  • had been living in Poland for five years before the three-year interval prior to the year of their repatriation (other conditions apply).

Concerns over the “repatriation relief”

The allowance is designed to make Poland more attractive as a place in which to move one’s tax residence and to hold it out as a country that is eager to welcome top foreign professionals and experts. Come to Poland, get your Polish tax resident status and benefit from preferential tax rules over the next 4 years! Will it prove as easy as that in practice?

The law setting out the rules of the new allowance is in the early stages of the legislative procedure, so the exact wording of the provisions may continue to evolve. 

  • Necessary proof to demonstrate eligibility

    One of the requirements to be satisfied to claim the “repatriation relief” is to hold a certificate of residence or other document certifying a person’s tax residence in the period relevant to establishing their eligibility. And it is already at this point that concerns arise along with the risk of a dispute with tax authorities.

    What document other than a certificate of residence will tax authorities be willing to accept to establish a taxpayer’s right to claim the allowance? Will e.g. the annual tax return filed with a foreign tax office do? And what if the taxpayer did not file any tax returns to the local revenue service before returning to Poland and therefore is not able to get any official certificate? If tax authorities’ approach and practice prove to be strict in this respect, some people will be considered ineligible although they should be expected to be in a position to claim the allowance given the purpose underlying the draft law.

    What is also noteworthy is the equivocal criteria applicable for establishing a person’s tax residence jurisdiction. As we point out in the article entitled Rezydencja podatkowa – czemu właśnie teraz znajdzie się pod lupą władz skarbowych?/ Tax residence – why will it come under tax authorities’ close scrutiny now?, a problematic issue is the subjective evaluation of the criteria relevant to establishing where the place of a person’s vital interests and economic interests is to be found. Another important thing is that there is actually no document or administrative decision that would conclusively decide a person’s tax residence. It may happen that even a foreign tax residence certificate will be insufficient to document an individual’s tax residence, as it is not unlikely that two or more jurisdictions will claim that a person is their tax resident.

    As for the “repatriation relief”, a Polish tax authority may conclude that a person has not actually changed their tax residence on account of working abroad for several years as long as it is established that their centre of vital interests remains in Poland. A person’s centre of vital interests is in Poland if e.g. they have a family, registered address, property or other permanent source of revenue in Poland. 

  • If the lawmaker changes their mind

    If we look at the frequency of tax regulatory developments in Poland, it is clear that taxpayers should have the certainty that if they choose to repatriate to Poland with a view to benefiting from a preferential tax regime, the law governing the allowance will not be abruptly changed or otherwise modified. It would be advisable to clarify the law so as to ensure that those returning to Poland enjoy maximum protection. What produces an opposite effect is the section saying that the Minister of Finance will be in a position to amend – by way of a regulation and at any time – the list of the eligible countries in which a taxpayer stayed before returning to Poland. 

  • The “repatriation relief” and social security (ZUS) contributions

    Some time ago the Ministry of Finance announced on its webpage that the “repatriation relief” would also affect social security charges and that employees’ and service providers’ old-age pension and disability insurance contributions would be funded by the state. However, this announcement is not reflected in the bill amending the tax laws (including the wording of the bill with the modifications resulting from public consultations), which may suggest that the planned changes will not extend for social security charges. Please note that as regards the exemption for taxpayers of up to 26 years of age, they are exempt from PIT but their ZUS contributions are due nevertheless. If the lawmaker drew inspiration from this solution, it is reasonable to expect that the two allowances will involve an identical mechanism for social security purposes. 

The “repatriation relief” and exit tax

If you change your tax residence, you should consider the so-called exit tax, which may affect you in future when you choose to move your tax residence abroad. As we point out in the article entitled Szykuje się zimny prysznic dla Polaków zarabiających za granicą. Co dalej z ulgą abolicyjną? / A damper now in store for Poles earning their living abroad - will the abolition deduction survive?, under the PIT Act tax on income from unrealised profits is chargeable when a taxpayer with the unlimited liability to tax in Poland changes their tax residence, the result being that Poland is denied the right to charge tax, whether in whole or in part, on the sale of the taxpayer’s asset in connection with their domicile being relocated to another jurisdiction. Hypothetically then, if the taxpayer finds out that their return to Poland is not advantageous and would like to change their tax residence country again, they may be liable to pay exit tax.  

Foreign lump-sum tax – another incentive to prompt change of tax residence

The lawmaker offers another specific solution to those seeking to move their tax residence to Poland if their assets reach extraordinary levels, namely the so-called foreign lump-sum tax. To put it briefly, a foreign national or a Pole who has been (tax) resident in another jurisdiction for at least 5 years during the recent 6-year period and continues to earn incomes from that jurisdiction after repatriating to Poland will be in a position to pay tax on such incomes which corresponds to a fixed sum of PLN 200,000 per annum. 

This preferential tax scheme will be restricted to revenues earned abroad, namely revenues Poland would not have been in a position to tax if the taxpayer had not moved their tax residence. This scheme will continue to be available for the purpose of reporting taxpayers’ foreign incomes in Poland over as many as 10 years (!) from the point of moving their tax residence.

Importantly, one of the conditions for claiming the lump-sum tax will be that a person must invest in projects in areas such as economic growth, science and education development, protection of cultural heritage or promulgation of physical culture in line with the requirements set out in a separate implementing regulation, with the annual mandatory investments totalling PLN 100,000.

The other conditions applicable for those seeking to benefit from these rules include filing a once-only statement on the election of this tax scheme along with a certificate of tax residence or other certificate documenting a taxpayer’s tax residence in the relevant period preceding the tax year in which the taxpayer moved their tax residence to Poland.

As the foreign lump-sum tax is an option for those who hold assets of significant value, the group of those wishing to benefit may prove small in number (e.g. football players or celebrities). It is advisable to find out what level of incomes makes the option worth considering.

Are the solutions offered to those moving their tax residence likely to become popular?

Poland is seeking effective ways to attract new taxpayers and expand its taxpayer base within the shortest possible time. Do tax reliefs such as the “repatriation relief” or the foreign lump-sum tax augur well for the plan?

It seems that the bill embodies the intention to meet halfway not only with professional employees and entrepreneurs but also foreign companies that may consider setting up their branches in Poland. Since the preferential tax schemes will be available over several years not only to “Polish repatriates”, it seems that the first taxpayers willing to relocate will not be hard to find. The “repatriation relief” as it is now may also prove an important incentive for employers which co-fund their employees’ or subcontractors’ tax burdens, as the change of tax residence and moving it to Poland would enable them to generate quantifiable savings. For this reason, with the “repatriation relief” scheduled to come into force as early as 1 January 2022, it is advisable to assess your situation now (both individuals and employers) so that you can make informed decisions on your business growth plans in Poland. 

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Summary

The implementation of the Polish Deal means a true revolution for taxpayers. However it seems that the “repatriation relief” and foreign lump-sum tax embody the intention to meet halfway not only with professional employees and entrepreneurs but also foreign companies that may consider setting up their branches in Poland. The change of tax residence and moving it to Poland would enable to generate quantifiable savings. For this reason, with the “repatriation relief” scheduled to come into force as early as 1 January 2022, it is advisable to assess your situation now (both individuals and employers) so that you can make informed decisions on your business growth plans in Poland. 

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EY Poland
By EY Poland

Multidisciplinary professional services organization - Assurance, Consulting, Tax, Strategy & Transactions

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