Various components of remuneration may be subject to taxation under national and international legislation. There is a doubt regarding the place of taxation of income from the implementation of the incentive program. An employee delegated to work abroad and the issue of tax equalization.
The last of the publications in series “12 Rules of the Cross-Border Secondment of Employees” presents doubts regarding some issues of income taxation in case of seconding an employee. In this series we will present the most important issues related to the process of seconding employees to Poland and from Poland. 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.
Tax equalization in Poland
It often happens that an employee who is tax resident in Poland is also obliged to pay tax in the country of secondment. Such a situation occurs when the regulations of the country of secondment impose an obligation on the employee to tax income for work performed in that country.
To avoid a situation in which the employee’s remuneration will be lower due to the higher level of taxation in the host country (compared to the tax burden that would be imposed in Poland), the solution is to use the tax equalization method. This is a solution according to which, despite the situation in which the employee is delegated to work abroad and pays tax or social security contributions there, he will receive the same net remuneration that he would receive working all year round in Poland under the same employment conditions. Any resulting surplus of foreign liabilities over Polish liabilities will be covered by the employer on his behalf. However, if the foreign tax turns out to be lower, this will in turn be to the employer’s advantage.
The tax equalization method generates a doubt as to whether the employer’s expenses incurred in connection with the payment of foreign obligations constitute taxable employment cash benefits for the employee.
Following the definition of income in the PIT Act, the expenses incurred by the employer to cover the employee’s obligations allow the employee to avoid an expense, which in effect constitutes an accrual. The above is in line with the practice of the tax authorities.
Income components – Polish regulations
On the subject of the employment relationship during secondment, questions also arise regarding the components of an employee’s income that are taxable.
During the period of secondment, employees receive various additional benefits, such as separation benefit from their families, reimbursement of accommodation costs, travel expenses and business trip allowance. Under Polish tax law, these allowances constitute the employee’s income and must be taxed. Exceptions to this rule are set out in the PIT Act.
Doubts arise if the employee’s income is also or only taxable in another country, in which case it must be verified whether individual components of the remuneration are taxable under the laws of the country of secondment or under a double taxation agreement.
Motivational programs – Polish regulations
As a result of motivational programs implemented by the employing company, employees may receive shares of that company. Under Polish tax regulations, income in this respect arises on the employee’s side, but only at the time of paid sale of shares. This allows for the simplification of tax settlements. We will discuss the topic of motivational programs in more detail in our next entries.
It may happen that at the time of acquisition of the option, the employee was tax resident in Poland, but was subsequently seconded and lost Polish tax residence. At the moment of disposal of the shares for consideration, the employee is already tax resident in the country of secondment. The question then often arises as to where such income should be taxed. The position of the tax authorities is divergent in this respect, so it is worth obtaining an individual interpretation in your own case.
In summary, the change of tax residence and place of taxation of employment income raises many questions, examples of which are those described in this article. In order to protect the interests of the taxpayer, it is often a good solution to obtain the support of a qualified tax advisor.
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
