Agreement on the avoidance of double taxation is an extremely important part of running a business. What is it? When does the double taxation appear? You will find answers to these and other questions below – we invite you to read!
Double Taxation – Where Does It Come From?
Double taxation affects Polish taxpayers who earn money both in Poland and abroad. They must pay tax on income according to the unlimited tax liability. As taxpayers are bound by the principle of source taxation, they must also pay income tax abroad. Such a phenomenon leads to double taxation.
Who is a Polish Tax Resident?
This term refers to taxpayers who meet at least one of the following criteria:
- Having the centre of vital interests in Poland despite working abroad on a daily basis. This means residing in the country of the closest family, including spouses and children. Other factors include for example owning real estate and investments. Engaging in political, social, or cultural activities also qualifies.
- Residing in Poland for more than 183 days in the tax year.
In some cases, countries with a double taxation treaty may both recognise the taxpayer as a tax resident. In such cases, the rules of conflict of laws apply. These are provisions in the treaty that help to resolve which country’s tax resident a person is. In most cases, the centre of vital interests is considered more significant.
What is the agreement on the avoidance of double taxation?
Agreement on the avoidance of double taxation is contract between two countries. They aim to prevent double taxation of income earned in one country by a resident of the other.
Double taxation occurs when a taxpayer has to pay tax on the same income in two different jurisdictions. Agreement on the avoidance of double taxation is to prevent such situations.
They may cover various types of income. For example: income derived from employment, business, real estate, dividends, or interest.
These written agreements establish the rules regarding which country has the right to tax income of a particular type. They also specify what deductions can be applied by the taxpayer.
What are the Methods of Avoiding Double Taxation?
Poland is a party to many international treaties that guarantee taxpayers the limitation of the negative effects of double taxation. As a result, doing business in Poland does not result in double taxation.
| Methods of Avoiding Double Taxation | |
| Exemption with Progression Method | Proportional Deduction Method |
| – Involves taxation only of the income earned in the country of tax residence. The amount of income earned abroad is used to determine the income tax rate that the taxpayer must pay. – The process proceeds as follows: 1. Calculation of the sum of incomes earned in Poland and abroad converted into the currency of the country of tax residence. 2. Calculation of income tax according to the general rules (tax scale). 3. Determination of the tax rate in Poland. For this purpose, the amount obtained in the second step is divided by the sum of incomes (1) and then multiplied by 100%. The result gives the tax rate. 4. Calculation of the tax due. | – Applies in situations where the taxpayer earns income abroad, but the agreement between Poland and the country where he earns income does not include a provision on the exemption with the progression method. Applies also when no agreement on the avoidance of double taxation has been concluded between the countries – Provisions regulating this issue can be found in the Personal Income Tax Act. – When calculating the tax amount due in this variant, it is necessary to sum up the incomes earned in Poland and abroad. Then you should deduct from it the amount of income tax that the taxpayer paid abroad. the resulting amount cannot exceed the portion of income that was taxed abroad. |
Double Taxation and Abolition Tax Relief
Polish tax residents can benefit from the so-called abolition tax relief
The possibility of using the relief occurs when the taxpayer earns income abroad as a result of:
- the service relationship, employment relationship, contract work and cooperative employment relationship,
- activities performed personally,
- business activity, taxed according to the tax scale, flat-rate tax, or lump sum on recorded revenue,
- property rights regarding copyrights and related rights within the meaning of separate regulations, from artistic, literary, scientific, educational, and journalistic activities performed outside Poland, with the exception of income (revenue) obtained from the use or disposal of these rights
- to which the proportional deduction method applies.
Agreement on the avoidance of double taxation – Summary
Double taxation concerns situations where tax residents earn income both in Poland and abroad. Agreement on the avoidance of double taxation is international contract that establish rules for taxing such income. Their goal is to prevent double taxation.
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FAQ – Questions and Answers on agreement on the avoidance of double taxation
What is agreement on the avoidance of double taxation?
Agreement on the avoidance of double taxation is contract between two countries aimed at preventing situations where a taxpayer is taxed for the same income in both countries.
Who is considered a Polish tax resident?
It is an individual or legal entity that meets certain criteria, e.g. having the centre of vital interests in Poland. Another crucial condition is staying in the country for a specified number of days in the tax year.
What benefits does the agreement on the avoidance of double taxation bring?
Agreement on the avoidance of double taxation help avoid situations where income is taxed in two different countries. This would lead to an excessive tax burden.
What are the methods of avoiding double taxation?
There are various methods of avoiding double taxation. One can choose the exemption with progression method or the proportional deduction method.
How does the exemption with progression method differ from the proportional deduction method?
The exemption with progression method involves taxing only the income earned in the country of tax residence. The proportional deduction method takes into account both domestic and foreign income.
When can abolition tax relief be used in the context of double taxation?
Abolition tax relief can be applied when the taxpayer earns abroad income, which is subject to taxation both in the country where it was earned and in the country of tax residence.
What are the consequences of the lack of agreement on the avoidance of double taxation?
This can lead to situations where the taxpayer is taxed for the same income in two different countries. It can result in an excessive tax burden.
What are the key elements of agreement on the avoidance of double taxation?
The key elements include determining which country has the right to tax certain types of income. It also specifies what deductions can be applied by the taxpayer.
Is there a list of countries with which Poland has agreement on the avoidance of double taxation?
Yes. Poland is a party to agreement on the avoidance of double taxation with various countries around the world.
What is the conflict of laws rule in the context of agreement on the avoidance of double taxation?
The conflict of laws rule is a provision in the agreement on avoidance of double taxation that determines how to resolve situations where a taxpayer is recognized as a tax resident of two different countries.