Opinion: How to lose friends and alienate people

The proposal is speeding its way through the legislative process in record time. It was passed by the Sejm on October 27, amended by the Senate on November 9, and is being reviewed again in the Sejm. I am not aware of any representatives of foreign companies being invited to comment on the legislation. If, as it appears, the proposal is signed into law by the end of November, it will negatively affect those companies and virtually all foreigners living in Poland starting in 2007.

Designed by committee

The last time I saw such poorly conceived legislation was the VAT law enacted in mid-2003. I moved to Poland in 1994 as the chief financial officer of a multinational company and had to learn a lot about the evolving tax system in Poland. Within a few months I was joking that the VAT system was designed by a committee who studied the worst aspects of other countries' VAT practices, and implemented them here. Fortunately, the legislators listened to Polish and foreign investors and made numerous changes.

But now they're back to their old ways. This tax proposal redefines who is considered a resident for tax purposes, and therefore dramatically increases the number of people who are subject to unlimited tax liability in Poland. This appears to be targeted at foreigners, especially those (like me) who invest in Poland, expand companies here, employ staff and pay local and corporate taxes. 

Privileged to pay

The proposed legislation treats anyone living in Poland for more than 183 days, or who has a major economic interest in Poland, as a citizen for taxation purposes. Foreigners, like citizens, would have the "privilege" of paying taxes on worldwide income in Poland, subject, of course, to double-taxation treaty limitations. If your country has such a tax treaty, you pay the higher of the two countries' taxes; if they do not, you pay both taxes, which could exceed 100 percent of your income. Poland will likely have the higher tax of the two countries, except for a few countries, such as France.

The impact can be best understood using examples. A US citizen, who is taxed on worldwide income by the US, would likely pay a 28-percent marginal tax rate in the US for income there. If that person stayed in Poland for more than 183 days in 2007, they would now have to pay 40 percent in Poland instead, even if none of the work was performed in Poland, or had anything to do with Poland.

A foreigner with investments in Luxembourg (or anywhere else), would also be taxed on their investment income in Poland, including their capital gains. Poland simplifies the calculation though, so that capital losses, which are typically offset against gains in most other countries, are ignored. This means that a foreigner living here will have to pay tax on all capital gains, even if they had a net capital loss, since they cannot deduct their losses.

If in doubt, pay up

It appears that foreigners with investment earnings within their private pension plans should also plan to pay Polish tax on that income if they live here, which puts an end to any tax-free growth of investments until retirement. Their home country may treat it as tax exempt, but Poland does not. So whether a foreigner has investments for retirement in another country or is drawing benefits from their pension plan, or from their national social-security plan, they should prepare to pay tax in Poland - or check with their adviser.

While talking to their tax adviser, they should also check if their company's contributions to their pension plan and medical care is taxable here. For companies that provide tax equalization for their executives, moving their residence to Slovakia or the Baltic countries is starting to look pretty attractive.

I cannot predict how many foreigners will join me and decide to leave, or how many companies will decide the impact on their executives' personal tax is too high to bother doing business in Poland. I can safely predict that this will reduce future foreign direct investment and thus productivity and employment growth.

Ron Nawrocki is managing director of BI Solutions in Poland and Hungary, and the chairman of Republicans Abroad in Poland