Under the amended Article 27g of the PIT Act, the deduction under abolition relief from 2021 may not exceed the tax-reducing amount i.e. PLN 1,360.
Abolition relief in practice
The raft of changes brought by the Act amending the Personal Income Tax Act, signed by the President on 28 November 2020, includes imposition of a limit on deducting the relief referred to in Article 27g of the Act of 26 July 1991 on Personal Income Tax (hereinafter: PIT Act).
Introduced in 2008 by way of article 27g of the PIT Act, the abolition relief, in its current form, led to the equalization of the tax situation of individuals working in countries applying different methods of avoiding double taxation in their dealings with Poland, namely the proportional tax-credit method and the exemption with progression method. In practice, abolition relief corrected the difference between a lower tax paid abroad and the tax which would be calculated in a higher amount in Poland on the same income. In other words, thanks to the abolition relief, individuals earning their income outside Poland did not have to pay the difference between the foreign tax and the tax due in Poland.
In light of the above, the only "side effect" of earning income in countries applying such methods was to increase the effective tax rate on income taxable in Poland, just as in the case of income to which the exemption with progression method applied.
It is worth noting that in a situation where a Polish tax resident did not obtain any income from sources located in Poland, taking advantage of the abolition relief equalized the amount of their tax liability to zero.
The goal behind the amendments
According to the explanatory memorandum to the bill, "the goal behind the planned measures, aimed at tightening up the Polish personal income tax system, is to limit the application of the abolition relief referred to in Article 27g of the PIT Act.
The essence of the abolition relief is to eliminate the effect of the proportional tax-credit method in relation to selected sources of income and to equalize their effective taxation with the outcomes of the exemption with progression method. Since the introduction of the abolition relief to the Polish tax system, the grounds for its application have changed significantly. Firstly, the awareness of taxpayers as to the tax consequences of earning income in another country has increased. Secondly, it was noticed that the abolition relief, along with provisions of double tax treaties, started to be used as tools of aggressive tax policies. Consequently, it gave rise to the need of changing the method of abolition relief application, so that it would be used only by those taxpayers who earn the lowest incomes, and therefore are in the biggest need of reducing their tax burden”.
Given the above, it should be emphasized that the use of the abolition relief in its past shape led to situations where some taxpayers were exempt from the tax in the country where the income was earned, while in Poland, under the abolition relief, their tax liability amounted to zero.
Furthermore, following Poland's accession to MLI, many double tax treaties signed by Poland before 2018 were amended to replace the exemption with progression method (up to then used, among others, in the conventions singed with the UK, Ireland and Belgium) with the proportional tax-credit method, thus extending the application of the latter.
Significance of the amendments and application of the abolition relief from 2021
Under the amended Article 27g of the PIT Act, the deduction under abolition relief may not exceed the tax-reducing amount i.e. PLN 1,360.
Therefore, if the tax on income paid abroad is lower by more than PLN 1,360 than the value of tax calculated on the same amount in Poland, the taxpayer will be obliged to pay the outstanding tax in Poland. In other words, once the application of abolition relief becomes limited, in certain cases, individuals earning their income outside Poland will have to pay the difference between the foreign tax and the tax due in Poland.
In addition, the relief will be unavailable to individuals performing work or services outside the country's land territory (including seafarers and offshore workers).
At this point, it should be noted that there exist certain categories of income exempted in the country where it was earned (i.e. income related to accommodation, allowances, travel costs) which in Poland constitutes income, thus significantly increasing the taxation of material benefits for mobile workers. An example can be found below.
EXAMPLE:
Settlement for 2020
The employee's income in PL is PLN 95,000
The employee's income in the Netherlands (including benefits in kind) is PLN 223,000
Tax base after deduction of ZUS contributions and tax-deductible costs is PLN 292,000
The calculated tax is PLN 80,844
The tax paid abroad is PLN 10,457
The abolition relief amounts to PLN 47,469
The contributions for health insurance amount to PLN 22,919
The tax obligation amounts to PLN 0
Settlement for 2021
The employee's income in PL is PLN 95,000
The employee's income in the Netherlands (including benefits in kind) is PLN 223,000
Tax base after deduction of ZUS contributions and tax-deductible costs is PLN 292,000
The calculated tax is PLN 80,844
The tax paid abroad is PLN 10,457
The abolition relief amounts to PLN 1,360
The contributions for health insurance amount to PLN 22,919
The tax obligation amounts to PLN 46,109
Written by:
Kuba Lewandowski, Tax Advisor, Assistant Manager, Tax, Global Mobility Services, KPMG in Poland
