Stop thinking about it as "your" money!

It's that time of year again - just five and a half weeks to the April 30 deadline when we have to file our annual returns and hand over yet more hard-earned money to the Tax Office. So, get out your pencils, your notepads, your calculators and all the bills and VAT receipts you can find, and let's begin.

As Albert Einstein once said, "The hardest thing in the world to understand is income tax." Therefore, I have broken my column into a two-part series to make the process less painful. The first part sets out who has to pay tax on what and the second part, which will follow in my next column, deals with available deductions from both income and tax.

Those who have already had their tax returns prepared by a trusted tax adviser may wish to turn to another page, while the rest of you read on. Please note that because I do have a word limit for my column, the text below is in a somewhat telegraphic form. So if you are in any doubt, double-check with your tax adviser before filing.

To complete your 2002 return in Poland, you must first determine your tax status. I have discussed the definition of "residence" in a number of earlier columns, so I will not go into mega-detail here. In simple terms, if you were in Poland for a temporary stay and EITHER did not exceed 183 days here OR you entered into an employment contract with a Polish company created with foreign capital, then you qualify for limited liability. Everyone else has unlimited liability.

Limited liability means you will be subject to Polish tax on Polish source income only (all income related to your work in the country, regardless from where it was paid); unlimited liability means your entire worldwide income is subject to Polish tax.

If you were here for less than 183 days in 2002 and paid entirely from abroad with the costs of your assignment not recharged to Poland, it is possible that you could stop here. Assuming you remained a tax resident of another country and that other country has a double-tax treaty with Poland, then you are able to exclude that income from being taxed in Poland.

If you exceeded 183 days here, you will have to read on, but keep in mind whether your tax status is limited or unlimited.

If you received employment income from a Polish company, you should have received a PIT-11 form. If you received employment income from abroad, you will have been filing personally (or through your adviser) monthly returns (PIT-51 or PIT-52). If you received income taxed at a flat rate, you will have received a selection of forms IFT-1. If you received income under a civil law contract (umowa zlecenia), you might also have received a form PIT-8B.

In general terms, unless the only income you earned is specifically excluded from tax in Poland, you will need to file an annual return.

Employment income for 2002 should be taxed at these rates:

But first you get a "cost of earnings" deduction of zł. 96.26 per month (zł. 1,155.12 per annum, and not exceeding a maximum of

zł. 1,732.72 per annum if you had multiple employment). In certain circumstances (living away from your place of work), you may be entitled to specially increased costs of earnings at zł. 120.33 per month (zł. 1,443.90 per annum to a maximum of zł. 2,165.90 per annum) if you have multiple employment.

Management board fees and payments under civil law contracts (umowy zlecenia, o dzieło or kontrakty menedżerskie) will have had tax withheld or paid at a flat 20% rate throughout the year.

If you had limited liability, copy the figures from your PIT-11 form (and PIT-51s, if appropriate) onto the PIT-37 annual reconciliation form and calculate the tax. Because of the way tax progression works (i.e., you only pay the higher rate of tax from the month following the month in which your cumulative income exceeded the appropriate bracket), it is likely that the withholdings made during the year will not tally with your ultimate tax liability, and you may have a small underpayment.

For those with limited liability, there is no need to include in the annual reconciliation any income taxed at the 20% rate during the year as this was a final tax.

If you had unlimited liability, then filling out your annual reconciliation will be much more fun. Unlike those individuals with limited tax liability, not only will you have to include in your annual reconciliation all income subjected to tax withholding during the year at 20%, but also you will be expected to make up the difference to the appropriate progressive tax rate up to 40% depending on the total level of your cumulative income. Ouch!

For those with a civil law contract, such as the umowa zlecenia, at least you get to deduct statutory costs of earnings at 20% (or actual documented costs if higher). But beware those with management contracts. You can only deduct actual documented costs for 2002. Anyway, the good news is that if you are able to deduct statutory costs, you only pay tax on 80% of your income, thus decreasing your effective tax rate (assuming a top-rate taxpayer) to around 32%.

For income other than salary or work income, other rules apply. Personal bank and other investment interest income are now taxed at source at a flat rate of 20% (remember those IFT-1 forms you keep getting from the bank each month?). Dividends are taxed at 15%. Profits made from trading on the Warsaw Stock Exchange are free of tax until the end of 2003.

If you have limited tax liability, any income received for work performed outside the country or foreign sources of income, such as from renting your house back home, are also outside the scope of Polish tax. If you have unlimited liability, this is taxable.

Next time: the deductions available from income and tax, who can benefit from them and what the limitations are.

amount of tax due

Up to zł. 37,024:

19% of assessment base minus zł. 518.16zł. 37,024 to zł. 74,048:

zł. 6,516.40 + 30% of amount exceeding zł. 37,024

More than zł. 74,048:

zł. 17,623.60 + 40% of amount exceeding zł. 74,048