Pay your taxes today, prepare to pay more tomorrow

Last time I reminded you of the looming income tax deadlines and probably spoiled your post Easter-break good humor. With the help of legislators, I plan to do a little more of the same in this column. But this time I will be looking forward (so to speak) to the next tax year, 2003, and potential changes to the Personal Income Tax (PIT) law. Please remember, my ramblings are to keep you informed and up to date - some or all of the changes listed below (there are many more but I figured these would be most interesting) may not make it through a first reading in the Sejm, let alone through to published law for 2003. However, many are in line with Poland's pending European Union accession and many, like them or not, make a certain amount of logical sense. If they don't become law now, we can expect to see them again in the not too distant future.

The following is a summary of the Finance Ministry's most significant proposals for the PIT law:

Limited tax liability The 183-day rule grants limited or unlimited tax liability depending on how long you stay in Poland. Under the ministry's proposals, limited tax liability through an employment contract with a company created with foreign participation or on the basis of not exceeding 183 days in Poland in a given tax year would be eliminated. There may be no more need to worry about whether your stay in Poland can or should be considered "temporary." The tax status of an individual will depend solely on his place of (permanent) residence, with consideration given to the double-tax treaties. Individuals with a place of residence in Poland will have unlimited tax liability (that is, worldwide income taxable in Poland) while those with a place of residence outside Poland (probably requiring the issue of a certificate of residence by that other country's tax authority) will have limited tax liability. There will be a much greater risk that the tax authorities may claim that some expatriates working in Poland are Polish residents and consequently the 20% flat rate on service (management) contracts and management board fees could be denied.

Business activity Business activity will be specifically defined for PIT purposes. Business activity will mean any paid activity conducted on one's own account or on behalf of third parties (article 13 of the PIT Law provides an exception). Consequently, some freelance contracts may be reclassified as business activity - thus a 20% flat tax could be questioned.

Cost reimbursement Any reimbursement of costs made by an employer will be considered income of an employee. This, if passed, will hopefully acquire some fine tuning before it becomes law. Its current wording could cause an employee to be taxed twice on income if, for example, he uses his own (after-tax) money to pay a business taxi fare and is then reimbursed by his employer for that amount. Under the existing law this is, somewhat sensibly, tax neutral. Under the proposed new law the individual is taxed once on receipt of income and again on reimbursement of the amount paid out for business expenses - I have a suspicion this was not necessarily the legislators' intent!

Damages Damages will be tax exempt only if "directly" provided in the law - specifically, only if law allows the calculation method. Moreover, damages will be taxable if paid under an agreement or settlement.

Disposal of real estate Income from the disposal of real estate will be exempt if credited against a mortgage that is drawn no more than two years from disposal of the property. This provision will not apply if the mortgage has been subject to the new housing allowance whereby interest accrued and paid is deductible from taxable income. The new tax allowance will be available to individuals with unlimited tax liability only. Avoidance of double taxation Income generated by an individual who is subject to unlimited tax liability (a Polish resident) that is sourced and taxed in countries with which Poland does not have a double-tax treaty will be exempt from taxation in Poland regardless of the reciprocity rule.

Cost limit for managers Tax deductible costs in the case of income from board membership and management contracts will be limited to 0.25% of the first tax bracket (as in the case of employment income).

Redemption of shares Redemption of shares acquired as an in-kind contribution will not be subject to withholding tax. Such income will be subject to progressive taxation. The book value of net assets of the enterprise on the day of contribution will be a deductible cost. The new rule is applicable to shares acquired up to 30 days from the day the new law was published. Also under this heading, voluntary redemption of shares will be subject to withholding tax.

De-merger The de-merger of a company will be treated in the same way as a merger.

Tax on capital transfer The 2% tax on amounts transferred abroad will be limited to situations where transfers are made for the purpose of purchasing securities and derivatives and, unless new wording is added to the law, will apply equally to residents and non-residents. That should give you something to mull over until my next column, which I promise will be more upbeat. Until next time!

Anna Szymańska is a senior manager in Andersen's Warsaw office.