Another expat concession bites the dust
This is the time when next year's proposed tax law changes start appearing. The question that arises is whether to prepare for the new requirements now a waste of effort if the president vetoes the changes or wait until they are signed into law by the end of this month, and then push through the necessary adaptations in December when people are more focused on turkey or carp and sundry other seasonal festivities.
This year's nightmare is the proposed challenge to that old favorite, the service contract structure. The bigger collateral damage is tangential to the main thrust of the changes, but may cause far more problems, especially among our expatriate readership.
By way of background, if you're an employee you pay tax at a top rate of 40%. If someone is rendering services in an independent capacity and is a full Polish tax resident, it is possible in certain cases to have a deduction of 20% for the cost of obtaining earnings (even if you've had no costs!). This means that if you are paying tax at 40%, the effective rate becomes only 32%. Also, there's a cash-flow benefit, as only 20% tax is withheld during the year, and the rest is payable at the end of the year. If you're an expat, 20% is the final tax but you don't get the 20% deduction.
There used to be some social insurance (ZUS) benefits as well, but as a result of some basic anti-avoidance deterrents and the ZUS ceiling introduced last year, that benefit has substantially gone away.
The proposed changes starts from a difficult-to-argue premise: If you are working for one company as if you were to all intents and purposes an employee, and incurred no costs in obtaining your earnings, then why should an artificial 20% of your income be free of tax?
There's little justification for such a deduction, so you've got to be prepared to let that one go. As tax authorities become increasingly sophisticated, loopholes will inevitably disappear, and I prefer to celebrate the fact that we were able to use this particular loophole for so long rather than lament that something so ultimately unjustifiable has disappeared.
Interestingly, while Polish law has accepted employment contracts (labor law) and service arrangements (civil law), and you can be appointed to a management board through a shareholder resolution, or hired on an employment or service contract, there is no concept of a management contract as a stand-alone arrangement.
Additionally, this section of the law also includes the taxation of management board duties, which are subjected to the same 20% withholding rate during the year for Polish nationals and expatriates but do not carry the 20% deduction. So if you work in a managerial capacity but are not on the board, you are treated differently than someone who is on the board something that defies economic logic.
But then, inevitably, the bun fight starts with the technical way the changes were implemented in the law. Apologies if you're not a legal technician, but here goes.
At the moment, the relevant paragraph talks about how service agreements are taxed. In the proposed changes, a separate paragraph has been introduced to talk about management contracts.
If your services are technical or operational and definitely not managerial, then probably nothing has changed. If, however, you are in a management position, not on the board, and hired on a service contract, then you've lost your 20% deduction.
What's not so clear in practice is how you actually treat taxing management board members because the current management board paragraph is still there unchanged along with the new, proposed paragraph stating that management contracts are taxed differently. This appears to imply that if you are appointed to the board without a contract, you get the old treatment. But if you are on the board with a service contract, then your tax treatment might change.
If you're Polish, the difference in tax cost is ultimately minimal. But if you're an expatriate board member, then things may change because the article that explicitly assigns the 20% tax rate to board fees for expatriates with limited tax liability (those temporarily in Poland for the purposes of taking employment in a company formed with foreign participation) remains unchanged. One article (article 13) lists the types of income and another (article 29) says how it is taxed. The changes to article 13 are not reflected in article 29, and so the "management contract," whatever that is, has not been brought into the basket of the types of income taxable at the 20% rate.
So if you're on the board, and there is only a resolution and no contract, then arguably nothing has changed. If there is any contractual arrangement, this is potentially reclassifiable as a management contract (after all, if a management board member doesn't manage, what does he do?) and therefore not automatically subject to the 20% tax rate. It's not clear how a management board member under a contract would be taxed; my initial hope that not being explicitly cross-referenced in any of the other paragraphs must mean that there is no tax payable at all unfortunately falls afoul of the "any other income" provisions.
And if you're not on a board but performing services of a management nature, then the 20% rate appears to be disappearing into the distance. Very few expatriate concessions last forever; the Czech Republic took away their "foreign expert" concession a few years ago, and most other countries only allow you to be an expatriate for tax purposes for a limited period of time. However, the last thing I expected was for it to disappear by accident. Even after all these years, the tax authorities can still surprise me.
Peter Ferrigno is a partner in the Warsaw office of Arthur Andersen.
