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 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.
SUMMARY:
- 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 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 taxations are concluded between states.
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.
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 method, the employee’s income earned abroad is excluded from taxation in Poland.
This method is used for example in the double taxation agreements concluded with: Germany, France Italy and Ukraine.
The credit method, by contrast, involves deducting the amount of tax paid abroad on the annual tax return from the tax due in Poland on the same income.
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 method of credit method is used, for example, on the basis of double taxation agreements concluded by Poland with: Austria, the Netherlands, Ireland, the United Kingdom and the USA
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. Unfortunately, as of 2021, the use of the abolition relief has been restricted.
In summary, double taxation agreements enable to avoid negative consequences when two countries have the right to tax the same income.
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
