Opportunity awaits to halve your tax bill
But there's not much to be said about tax amnesty - its failure is sufficient proof of its irrelevance to the above. And regarding the tax cuts, the real question is if these are gratuitous acts of giving or merely fiscal measures aimed at stimulating GDP growth. So, is it the extent of the genuine generosity, or the underlying intention that differentiates a gift from a mere deed?
Despite valiant efforts to unveil the mystery surrounding the amended Article 29, pt. 5 of the Personal Income Tax (PIT) Act, the question still remains open - was it meant to be a gift or an economic growth catalyst? Perhaps the answer lies somewhere entirely different. Perhaps it all happened by accident. Perhaps it's as simple as that.
To date, the lawmakers have not provided any formal reasoning for the amendment. Moreover, because its potential impact will be significant in financial terms for both taxpayers and tax authorities, the latter's varied reaction - from strong disagreement to passive indifference - should come as no major surprise. We can only guess how prepared the Tax Man will be to deal with the slump in tax revenue.
Having read through almost a third of the article, you have probably by now grown rather anxious to hear about the news itself. I will not keep you in suspense for much longer, but before I go on, I would like to thank my colleague Marcin Eckert for his innovative ideas and finding the time to share them with me.
To begin, the news only applies to individuals with limited liability to Polish tax as defined in the Polish domestic legislation; in other words, those who reside in Poland temporarily with no intention of settling here on a more permanent basis. Furthermore, it applies to certain types of income (i.e. qualifying income), including advisory, accounting, legal, marketing, advertising, management and control, data processing, recruitment and selection. Hence, expatriates who have limited tax liability can benefit from a reduced 20 percent flat tax on the aforementioned qualifying income.
At first glance this sounds like no news at all. Under the current PIT Law, expatriates with limited tax liability status are entitled to a 20 percent flat tax on directors' and service fees. That will still hold true. However, the novelty is in the lack of reference in the regulations to the legal form of a particular taxable activity. From a historical perspective, making the beneficial tax treatment dependent solely on the type of income is rather unusual.
For instance, assuming an individual who has limited liability to Polish law renders advisory services, he/she will be subject to 20 percent tax, which is flat and final (i.e. not reported on an annual tax return), regardless of the legal form of the respective contractual arrangement. In other words, it will be irrelevant whether the contract for advisory services is governed by Polish/foreign labor (employment) or civil law, i.e. whether, is an "umowa o pracę" or "umowa zlecenia" or any other type of contract for that matter.
Moreover, the beneficial tax regime will not be affected by the expatriates' remuneration structure, namely, if they are paid under a contract with the home country employer or the Polish company. The only difference will be in the reporting requirements. The Polish company will be responsible for filing an PIT8-A form and paying the 20 percent tax monthly in case it is party to the advisory contract with the expatriate. Cases where expatriates receive income from abroad under a foreign contractual arrangement, are not specifically addressed in the existing legislation. Therefore, the tax reporting obligations are currently somewhat unclear. The common practice in these situations is for the foreign company to make the tax settlements, directly or through a proxy, or for the expatriate to do so personally.
Even though the associated tax compliance may not strike you as fundamentally important, it is bound to cause confusion. Expatriates will have to determine if they are required to file their declarations with the Tax Office closest to home, to work, to the II Warsaw Tax Office which has so far handled foreigners' tax affairs, or the newly set-up special Tax Office for Large TaxPayers. The latter's functioning is still subject to public debate, as there is an inconsistency in the law regarding the start of its operations, i.e. from 2004 or 2005. In spite of these controversies, tax inspectors and files are physically moving to the notorious Mazowiecka 9 even as I type.
The tax regime discussed has a particular set-back, which makes it less attractive for lower income earners. Namely, tax deductions, including Polish social security contributions, are not deductible against income taxable at the flat 20 percent rate. Due to the fact that contributions are capped in Poland, failure to utilize the deductions will not be a material cost for most expatriates at management positions and higher. Therefore, before getting excited at the prospect of early retirement, take the time to do the simple math, or, if you are feeling hesitant about the level of the sickness/healthcare contributions, call your tax advisor.
Another word of caution - it is not as simple as I have made it sound. There are a few traps to watch out for, especially for board members, and the Tax Man himself can be a hurdle. This is almost guaranteed to occur when dealing with such brave tax planning. And also, hurry. There are less than two weeks left before the holiday season and just a bit more to go until the start of the new financial year.
Donka Darpatova is a tax manager in the Warsaw office of Ernst & Young.
Despite valiant efforts to unveil the mystery surrounding the amended Article 29, pt. 5 of the Personal Income Tax (PIT) Act, the question still remains open - was it meant to be a gift or an economic growth catalyst? Perhaps the answer lies somewhere entirely different. Perhaps it all happened by accident. Perhaps it's as simple as that.
To date, the lawmakers have not provided any formal reasoning for the amendment. Moreover, because its potential impact will be significant in financial terms for both taxpayers and tax authorities, the latter's varied reaction - from strong disagreement to passive indifference - should come as no major surprise. We can only guess how prepared the Tax Man will be to deal with the slump in tax revenue.
Having read through almost a third of the article, you have probably by now grown rather anxious to hear about the news itself. I will not keep you in suspense for much longer, but before I go on, I would like to thank my colleague Marcin Eckert for his innovative ideas and finding the time to share them with me.
To begin, the news only applies to individuals with limited liability to Polish tax as defined in the Polish domestic legislation; in other words, those who reside in Poland temporarily with no intention of settling here on a more permanent basis. Furthermore, it applies to certain types of income (i.e. qualifying income), including advisory, accounting, legal, marketing, advertising, management and control, data processing, recruitment and selection. Hence, expatriates who have limited tax liability can benefit from a reduced 20 percent flat tax on the aforementioned qualifying income.
At first glance this sounds like no news at all. Under the current PIT Law, expatriates with limited tax liability status are entitled to a 20 percent flat tax on directors' and service fees. That will still hold true. However, the novelty is in the lack of reference in the regulations to the legal form of a particular taxable activity. From a historical perspective, making the beneficial tax treatment dependent solely on the type of income is rather unusual.
For instance, assuming an individual who has limited liability to Polish law renders advisory services, he/she will be subject to 20 percent tax, which is flat and final (i.e. not reported on an annual tax return), regardless of the legal form of the respective contractual arrangement. In other words, it will be irrelevant whether the contract for advisory services is governed by Polish/foreign labor (employment) or civil law, i.e. whether, is an "umowa o pracę" or "umowa zlecenia" or any other type of contract for that matter.
Moreover, the beneficial tax regime will not be affected by the expatriates' remuneration structure, namely, if they are paid under a contract with the home country employer or the Polish company. The only difference will be in the reporting requirements. The Polish company will be responsible for filing an PIT8-A form and paying the 20 percent tax monthly in case it is party to the advisory contract with the expatriate. Cases where expatriates receive income from abroad under a foreign contractual arrangement, are not specifically addressed in the existing legislation. Therefore, the tax reporting obligations are currently somewhat unclear. The common practice in these situations is for the foreign company to make the tax settlements, directly or through a proxy, or for the expatriate to do so personally.
Even though the associated tax compliance may not strike you as fundamentally important, it is bound to cause confusion. Expatriates will have to determine if they are required to file their declarations with the Tax Office closest to home, to work, to the II Warsaw Tax Office which has so far handled foreigners' tax affairs, or the newly set-up special Tax Office for Large TaxPayers. The latter's functioning is still subject to public debate, as there is an inconsistency in the law regarding the start of its operations, i.e. from 2004 or 2005. In spite of these controversies, tax inspectors and files are physically moving to the notorious Mazowiecka 9 even as I type.
The tax regime discussed has a particular set-back, which makes it less attractive for lower income earners. Namely, tax deductions, including Polish social security contributions, are not deductible against income taxable at the flat 20 percent rate. Due to the fact that contributions are capped in Poland, failure to utilize the deductions will not be a material cost for most expatriates at management positions and higher. Therefore, before getting excited at the prospect of early retirement, take the time to do the simple math, or, if you are feeling hesitant about the level of the sickness/healthcare contributions, call your tax advisor.
Another word of caution - it is not as simple as I have made it sound. There are a few traps to watch out for, especially for board members, and the Tax Man himself can be a hurdle. This is almost guaranteed to occur when dealing with such brave tax planning. And also, hurry. There are less than two weeks left before the holiday season and just a bit more to go until the start of the new financial year.
Donka Darpatova is a tax manager in the Warsaw office of Ernst & Young.
