A comprehensive overhaul of Polish tax law is expected. The proposed changes would implement the Law & Justice government’s programme known as the “Polish Deal.” Some of these changes are intended to make the tax system more attractive to new taxpayers. Others are designed to encourage taxpayers who have used optimisation schemes in the past to put their tax affairs in order.
Below, we discuss three new tax law institutions that are expected to expand Poland’s tax base and extend the jurisdiction of tax authorities to capital that disappeared from their radar some time ago. All three areas would see the introduction of incentives: selective tax benefits for precisely defined groups of stakeholders.
An imported taxpayer is better than a homegrown one
The proposal would introduce a preferential form of personal income tax settlement for natural persons who transfer their residence to Poland and acquire local tax residency.
The deduction would be applied for four consecutive years, counting from the end of the year when the taxpayer moved his or her residence to Poland or the following year (base year), at the taxpayer’s discretion.
New taxpayers would be able to deduct an amount from income tax calculated according to the tax scale or flat rate:
- In the first year, 50% of the total amount of tax due for the base year
- In the second year, 50% of the total amount of tax due for the preceding year
- In the third year, 50% of the total amount of tax due for the preceding year
- In the fourth year, 50% of the total amount of tax due for the preceding year.
It is not clear from the provisions whether if, for example, in the second year, the total amount of tax due calculated for the preceding year should refer to the amount before or after application of the relief. The provision refers only to the rules on determining income due under Art. 27 or 30c of the PIT Act, while the relief is applied under Art. 27h of the PIT Act, to which there is no reference. Therefore, the wording of the provisions supports an interpretation more favourable to taxpayers. This issue is not explored in the explanatory memorandum to the bill, but the information published by the Ministry of Finance on its website indicates that the ministry favours a solution less advantageous for taxpayers.
A deduction not applied in a given year could be rolled over by the taxpayer for a period of 5 years, counting from the end of the tax year in which the first deduction was applied.
The draft provides that the deduction applies if the taxpayer:
- Is a tax resident in Poland and has resided in Poland for the whole year
- Earned income from specific sources: employment and similar relationships, activity performed in person, non-agricultural business activity, or copyright and related rights
- Lived outside of Poland for at least three tax years immediately preceding the tax year when they transferred their residence to Poland, as documented by a residency certificate.
If the basis for calculating the deductible amount is the tax determined in the names of both spouses, each spouse who is a new taxpayer would be entitled to a deduction in the amount determined in accordance with the above rules.
This proposal gives preferential treatment to tax residents moving to Poland, compared to persons who have been paying tax in Poland for years. In this case, the tax fairness often alluded to in the explanatory memorandum of the bill gives way to a pragmatic approach of building a taxpayer base and ensuring that it is less fiscally harsh for taxpayers working abroad to return to the country. Undoubtedly, this regulation may also reduce the number of disputes concerning tax residency of persons staying abroad, and in this respect, it should be assessed positively. However, the mere abandonment of the principle of tax fairness in favour of the pragmatic administration of the tax system is hard to accept, considering that the principle of tax fairness is the flagship cause of the significant increase in public charges paid by domestic taxpayers with above-average earnings.
Tax privileges for the elite of the elite
Acting to attract new taxpayers, the proponents have also formulated a new institution to serve only the wealthiest taxpayers.
The proposed regulations would allow new Polish tax residents to choose special rules for taxation of foreign income. Excluding the income of a controlled foreign company, the foreign income would be subject to a fixed, lump-sum amount of tax due annually. This would allow for reduced reporting.
The tax would be PLN 200,000 per year, regardless of the amount of income earned by the taxpayer.
To elect preferential taxation, the taxpayer would have to meet all the following criteria:
- Transfer tax residence to Poland
- Submit to the tax office in due time a declaration on election of lump-sum taxation according to the established formula, along with a residency certificate documenting the place of residence for tax purposes for the last six years
- Not have been a Polish tax resident for at least five of the six tax years in the period directly preceding the tax year in which the taxpayer transferred his or her tax residence to Poland
- Incur expenses for economic growth, development of science and education, protection of cultural heritage or promotion of physical fitness, in a manner specified in a separate regulation, in the total amount of at least PLN 100,000 per year.
In the event of an audit, the taxpayer would be required to produce evidence necessary to establish the amount, country of origin and period of earning foreign income, and prove that he or she incurred the above expenses in the required amount.
By virtue of the declaration on the election of lump-sum taxation, the taxation would be applied for a period of 10 consecutive tax years, counting from the tax year when the taxpayer moved his or her residence to Poland.
However, taxpayers could lose the right to apply this form of taxation if they resigned from the lump sum taxation in due time, moved their residence outside of Poland, did not pay the tax even partially on time, or did not incur the required expenses.
The spouse and children of the taxpayer within the meaning of the child tax relief rules could also benefit from the special lump sum taxation rules provided for in the draft. In relation to a taxpayer’s family member, the tax is set at PLN 100,000 per tax year, regardless of the actual income earned by the family member. Importantly, a member of the taxpayer’s family is not required to incur the expenses discussed above.
There is no doubt that also in this case, the principle of tax fairness gave way to the pragmatic approach of the proponents wishing to follow the international trend of tax competition. The situation of wealthy domestic taxpayers could be very different from that of the privileged new taxpayers. It is true that the proponents make it clear that the proposed solutions would apply to a very narrow group of taxpayers, but the significant increase of public charges for current taxpayers hardly seems compatible with granting benefits to new taxpayers.
Incriminating disclosure of tax optimisation
The draft proposes a temporary programme of voluntary disclosure by taxpayers of cross-border optimisation structures and untaxed income in return for lower taxation and a promise of exemption from criminal liability.
Such programmes have successfully operated in other countries over the past decade and significantly enhanced the tax administration’s knowledge of taxpayers and their resources.
The disclosure window would open on 1 July 2022 and close at the end of 2022.
The proposed “transitional” income tax on certain natural and legal persons and other organisational units would apply to taxpayers who have earned income not declared for taxation in full or in part, as well as remitters who have not correctly fulfilled their tax collection obligations.
The catalogue of situations covered by the programme includes:
- Failure to disclose income in full or in part
- Failure to disclose the source of income
- Transferring or holding capital in any form outside of Poland, including in a foreign entity
- Abuse of tax treaties
- Maintaining a sham tax residence
- Obtaining other tax advantages.
The programme excludes situations where obtaining a tax benefit was connected with commission of a crime, a fiscal crime or a fiscal petty offence about which the entity failed to notify the relevant authorities within a specified time limit.
Entities that on the date of submitting an application are subject to tax proceedings, a tax audit or a customs and fiscal audit involving undisclosed income could not participate in the programme.
In principle, the transitional tax would amount to 8% of the tax base. The subject of taxation would be income corresponding to:
- The amount of revenue that would be established for the taxpayer under the income tax acts, reduced by reasonable expenses incurred directly in order to obtain it
- The amount of revenue that would be determined by the taxpayer or remitter under the income tax acts and taking into account the relevant tax treaty
- The amount of revenue from capital transferred or held outside of Poland, including in connection with a change of tax residence, less expenses incurred directly to obtain such income
- 25% of the value of capital transferred or held outside of Poland, including in connection with a change of tax residence, or
- The value of the tax benefit within the meaning of the Tax Ordinance.
Joining the programme would be conditional on correct submission of a request according to the established template and payment of a fee equal to 1% of income (not more than PLN 30,000).
A Regional Council for Capital Repatriation would be established, to which the taxpayer or the taxpayer’s representative could apply for an assessment of whether to submit the aforementioned request to the head of the tax office or whether to withdraw from such an intention. Such a request could be anonymous and submitted through an attorney. The application for an opinion of the council would be subject to a fee of PLN 50,000.
The effective amount of taxes related to disclosures could be reduced by investing in Poland or elsewhere in the European Economic Area capital of a value not less than the income disclosed and maintaining that investment for at least 12 months. This would allow for obtaining income tax relief amounting in strictly defined cases to 30% of the transitional tax.
Although the wording of the proposal is not entirely clear, the additional benefits would consist of:
- Releasing a taxpayer who has voluntarily reported and paid the transitional tax from fiscal criminal liability for unlawful understatement of the amount of PIT or CIT to be paid, and exemption from income taxation on the reported income
- Releasing the remitter from liability for tax not collected, or collected in a lower amount than due, and from criminal fiscal liability for exposing the State Treasury to an unlawful reduction of the amount of PIT and CIT tax to be paid in relation to the income reported.
Is there a catch?
If the application did not meet the requirements set out in the act and the deficiencies were not remedied within 14 days, the application would be deemed not to be filed successfully.
The provisions require the application to state:
- The sources of income
- The method of acquiring it
- The amount of income (which the entity determines in the most appropriate method), and
- The amount of the transitional tax.
Additionally, the applicant would have to provide a methodology for determining the income disclosed and the expenses related to the income disclosed.
While these requirements seem fairly precise, they leave room for discretion as to whether the data presented is complete and correct. Questioning the completeness of such an application could lead to serious consequences, under tax law and fiscal criminal law, because an unsuccessfully filed application would not fulfil its protective function. Therefore, in deciding whether to disclose, taxpayers would also have to analyse factors not covered by the regulation, including their level of confidence in the revenue administration.
It is also a natural concern that the proponents of the scheme appear to equate tax optimisation with the commission of a criminal act, and would require notice of a prohibited act in order to enjoy the benefits of the programme. To equate these two notions is simply incorrect.
Wojciech Marszałkowski, adwokat, Tax practice, Wardyński & Partners