Every time employees are seconded, attention should be paid to the relevant double taxation agreement. State-to-state agreements introduce methods of avoiding double taxation that reduce the tax burden on seconded workers.
The seventh of the publications in series “12 Rules of the Cross-Border Secondment of Employees” concerns the problem of seconding employees in the context of double taxation agreements. In this series we will present the most important issues related to the process of seconding employees to another country. Each publication will present an individual issue in details. The entire series of articles will be a compendium of general knowledge on the cross-border seconding of employees.
The purpose of double taxation agreements
As a rule, if the employee is a Polish tax resident, then he/she is subject to unlimited tax liability in Poland, which in effect means that the “worldwide” income of such employee is subject to taxation in Poland.
In contrast, Polish non-residents are subject to limited tax liability in Poland, i.e. the income of such an employee is taxed in Poland only for work performed on Polish territory.
In some cases, under national law of each country, an employee’s income may be a subject of taxation in two countries at the same time.
Important
In order to prevent double taxation of such income, double taxation avoidance agreements are concluded between countries.
If such agreement is in place, the rules on the taxation of the seconded employee are to be determined on the basis of that agreement. It thus takes precedence over national legislation. If there is no double taxation agreement between countries, only national regulations should be applied.
The multilateral convention implementing tax treaty measures aimed at preventing tax base erosion and profit shifting, drawn up in Paris on November 24, 2016, and signed in Paris on June 7, 2017, has been ratified in many countries. Its aim is to standardize the rules regarding avoidance of double taxation.
Methods of avoiding double taxation
Every double taxation agreement specifies the method used to avoid double taxation. The most common methods are:
- Exemption method,
- credit method.
In the case of the exemption with progression method, to put it simply – the employee’s income earned abroad is excluded from taxation in Poland, but it influences the determination of the effective tax rate on other income.
An example of the use of this method is the double taxation agreement concluded with Germany and the Czech Republic.
Example of tax calculation according to the exclusion with progression method:
| income obtained in Poland | 50 000 zł |
| income earned abroad | 50 000 zł |
| total income | 100 000 zł |
| Polish tax according to the tax rates from PLN 100,000 | 8 400 zł |
| tax rate to apply to Polish income | 8,4% |
| tax payable in Poland (only on Polish income of PLN 50,000) | 4 200 zł |
In turn, the credit method involves deducting the amount of tax paid abroad at the time of the annual settlement in Poland from the tax due in Poland. This deduction is only possible up to the amount of tax attributable proportionally to the income obtained in a foreign country.
Example of tax calculation according to the credit method:
| income obtained in Poland | 50 000 zł |
| income earned abroad | 50 000 zł |
| tax paid abroad | 7 000 zł |
| total income | 100 000 zł |
| Polish tax according to the tax rates from PLN 100,000 | 8 400 zł |
| limit of tax paid abroad to be deducted from Polish tax | 4 200 zł |
| foreign tax deductible from Polish tax | 4 200 zł |
| tax payable in Poland | 4 200 zł |
IMPORTANT:
The principle of deducting the amount of tax paid abroad has also found a place in Polish tax law. It is expressed by the legislator in Article 27(9) and (9a) of the Personal Income Tax Act.
The credit method operates, for example, on the basis of double taxation agreements concluded between Poland and Belgium or Poland and the Netherlands.
As a rule, the credit method is less favorable than the exemption method with progression. In order to eliminate these inequalities, the institution of the abolition relief was introduced into the Polish legal system, which allowed to equate the credit method with the exemption method. However, a limit on the amount of the abolition relief was introduced. The amount deducted from personal income tax from January 1, 2021 cannot exceed PLN 1,360.
Pursuant to Art. 27g section 5 of the Personal Income Tax Act, there is an exception to the application of the deduction limit for abolition relief. The deduction is granted in the full amount, without any limit, in the case of earning income abroad, if the income is earned from work or services performed outside the land territory of countries.
Due to the above, taxpayers who earn foreign income outside the land territory of countries, as part of certain professions such as sailors, stewardesses or pilots, are entitled to settle their income taking into account the full amount of the abolition relief (without applying the introduced limit).
Summary
Double taxation agreements help avoid the negative effects of a situation in which two countries have the right to tax the same income. Thanks to these agreements, posted workers can avoid double taxation, which significantly reduces their tax burden and simplifies tax settlements. It is always worth checking what agreements apply between countries to correctly apply the relevant regulations and avoid tax problems.
Co-author: Karolina Nieścior, Tax advisory services
The series of “12 Rules of the Cross-Border Secondment of Employees” consists of the following articles:
- Cross-border secondment of employees
- Secondment and delegation
- Employee seconded to work in Poland
- Employee abroad – taxes in Poland
- Secondment – social and health insurance
- Secondment – documentation
- Secondment – double taxation agreements
- Secondment – income taxation in different countries
- Secondment – annual tax return
- Cross-border secondment of workers Directive
- Secondment – tax advisor assistance
- Secondment – additional questions
