On April 29, 2021, the Ministry of Finance published Tax Explanations on Tax Residence (hereinafter: Explanations). In practice, the Explanations provide guidelines on how to analyze the situation of taxpayers, which in turn allows to avoid doubts as to the place where the taxpayer has the center of vital interests.
Under Polish tax law there are two types of tax liability:
- Unlimited tax liability – all income earned by a natural person is subject to taxation in Poland;
- Limited tax liability – only income earned on the territory of Poland is taxable in Poland.
Unlimited tax liability occurs when natural person is a tax resident in Poland. Limited tax obligation on the other hand arises at the moment of having the status of a tax resident in another country and deriving income in the territory of Poland.
Determining tax residence
Determining tax residence, i.e. the state in which an individual is subject to unlimited tax liability was not clear in Poland for some time.
The Personal Income Tax Act contains a definition of the place of residence which includes two criteria that should be treated separately. These are:
- Duration of stay in the territory of Poland exceeds 183 days in a tax year
- having a center of vital interests in Poland, understood as the center of personal interests or the center of economic interests
The fulfillment of any of the above criteria results in the establishment of tax residence in Poland. If taxpayer stays in Poland for less than 183 days, it is necessary to verify that the criteria from point 2 have not been met.
In practice, however, the provisions of the relevant agreement on avoidance of double taxation are used to determine tax residence and takes precedence over the domestic provisions.
Center of vital interests
In the Explanations, the Minister of Finance indicated that “concentration” of personal interests in Poland is decisive for establishing tax residence. This should be understood as the existence of family or social ties on the territory of Poland, as well as undertaking social, cultural, sports, political activity, etc.
Having a center of economic interests on the territory of Poland was indicated as the last criterion in the Explanations. In practice, the above means that priority is given to the place where the taxpayer’s personal interests are located.
As indicated in the Explanations:
“In practice, the factor most often taken into account is the presence of a spouse, partner or minor children in Poland. (…) A trip to another country with the whole family will in most cases result in a transfer of the center of personal interests to that country. “
Thus, the fact of moving with the family abroad will result in the loss of tax residence in Poland. Similarly, if work is performed abroad and the taxpayer’s family remains in Poland, the taxpayer’s tax residence will still be in Poland (despite having center of economic interest abroad).
It is therefore worth pointing out that the mere registration of business activity or performance of work outside Poland does not result in a change of tax residence.
Such a position was previously expressed by the binding rulings, for example in the binding ruling of December 8, 2016, ref. No. 1462-IPPB4.4511.1195.2016.1.JM in which the tax office has agreed with the position of the applicant, according to which:
Explanations – example
The following example was presented in the Explanations:
>> Mr. Artur is a construction worker living permanently with his wife and children in Szczecin (Poland). Mr. Artur works on construction sites in Germany. While working in Germany, Artur lives in a workers’ hotel with other employees. In Poland, Mr. Artur lives with his family, to which he comes on weekends, on holidays, on vacation and during longer breaks at work. Does Mr. Artur have a center of personal interests in Poland?
>> Yes. Mr. Artur has close personal ties with Poland, because his wife and children live here all year round. Despite working in Germany, Mr. Artur regularly returns to his place of residence in Szczecin in a way that shows the maintenance of significant personal ties with Poland.
The above example clearly shows that the taxpayer’s personal ties are the most important, while the economic center is a secondary criterion.
In the light of the above, it is important to analyze the situation of the taxpayer each time, because despite the fact that all work abroad is performed, it may turn out that a given person is obliged to submit a tax return in Poland.
Summing up, the latest Explanations confirm the practice of tax authorities, according to which, in the field of determining tax residence, the criterion of center of personal interest is the most important factor. In the case of earning foreign income, it is important to properly determine the tax residence because it has a key impact on the way income is taxed in different countries.