Taxation of foreign benefits - good to know

Poles working abroad, who paid contributions to local social insurance, can count on foreign benefits granted on the basis of various legal bases. How is the taxation procedure for foreign benefits received by people residing in Poland? Read and learn about the rules on which foreign benefits are taxed!

Foreign allowance under an international agreement

To begin with, it is necessary to refer to the regulations of international tax law. Let us recall that pursuant to Art. 4a of the PIT Act, Polish regulations apply taking into account concluded international agreements. It is also worth emphasizing that ratified international agreements take precedence over statutes, which results from Art. 91 of the Constitution.

Of course, in each case, one should refer to the content of the relevant contract, however, according to the typical provisions usually found in Art. 17 international treaties on tax avoidance, pensions and other similar remuneration paid to a resident of a contracting state are taxable only in that state.

All kinds of benefits are also included in the above grouping.

Such wording of the provision indicates that the allowance is taxable only in one country, namely in the country of residence. This will also be the case if the allowance is paid from another country. Therefore, since the benefit is taxable only in one country, then in the described situation the method of avoiding double taxation should not be applied, because such double taxation will not occur at all.

Under a typical international treaty on the avoidance of double taxation, benefits are taxable only in the country of residence of the taxpayer.

Determining the place of residence of the taxpayer in the context of taxation of benefits

Since it follows from the content of the international agreement that the benefit is taxable in the country of residence, it is necessary to look at the provisions regulating this issue.

First, let's refer to Polish standards. In art. 3 sec. 1 and sec. 1a of the PIT Act, we can read that natural persons, if they reside in the territory of the Republic of Poland, are subject to taxation on all their income (revenues) regardless of the location of the sources of income (unlimited tax obligation).

A person residing in the territory of the Republic of Poland is a natural person who:

1. has a center of personal or economic interests (center of vital interests) on the territory of the Republic of Poland, or

2. stays on the territory of the Republic of Poland for more than 183 days in a tax year.

As can be seen from the provision cited, the place of residence, and consequently the place of tax residence, is determined on the basis of the center of vital interests.

Similarly, this issue is regulated in international agreements, because in accordance with the typical wording of Art. 4 sec. 2 lit. a contract, if a natural person is domiciled in both contracting states under the domestic laws of both countries, then the person is considered to be domiciled only in the contracting state in which he is habitually resident.

If she is domiciled in both countries, then she is considered to be domiciled only in the country with which she has closer personal and economic ties (center of vital interests).

When transferring the above to the issue of taxation of benefits, it should be noted that benefits will be taxed in the country where the natural person resides.

Example 1.

An individual has lived and worked in Great Britain for 25 years. After this period, she moved to Poland permanently with the intention of permanent residence. As a consequence of moving the center of life interests to the Republic of Poland, Poland became her place of residence. This person receives an allowance from the UK. In the light of Art. 17 of the Polish-British treaty on the avoidance of double taxation, this allowance is taxable only in Poland.

The place of residence is determined by the criterion of the center of vital interests. This allows you to determine the country in which the natural person is obliged to pay income tax on the benefit received.

Taxation of foreign benefits and exemption from PIT

In the light of the above provisions, if a natural person residing in Poland receives an allowance from abroad, this type of income is taxable only in Poland.

In principle, cash benefits are taxable as income from other sources as defined in Art. 20 paragraph 1 of the PIT Act. In this situation, we apply tax rates resulting from the tax scale. It can be stated that benefits are taxed according to general rules.

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However, it is possible to take advantage of the tax exemption specified in Art. 21 sec. 1 point 8 of the PIT Act.

As indicated in the provision, family benefits received under the provisions on family benefits, family and care allowances, benefits for caregivers received under the provisions on the establishment and payment of allowances for caregivers, cash benefits received in the event of ineffectiveness of the enforcement of maintenance payments, childbirth allowances are free from income tax. received on the basis of separate regulations and the educational benefit received on the basis of the provisions on state aid in bringing up children.

Importantly, the above exemption will apply not only to Polish, but also to foreign benefits.

This is confirmed, for example, by the interpretation of the Director of KIS of November 19, 2019 (No. 0115-KDIT2-2.4011.359.2019.2.RS), which indicates that during the period of unlimited tax liability in Poland, in accordance with the provisions of the Convention between the Great Britain and Northern Ireland on the avoidance of double taxation and the prevention of tax evasion with regard to taxes on income and on property gains, the benefit in the form of an allowance received by a UK taxpayer is taxable only in Poland.

At the same time, however, when the benefit is paid on the basis of the provisions on family benefits in force in Great Britain, it benefits from the exemption pursuant to Art. 21 sec. 1 point 8 of the Act.

Example 2.

A natural person residing in Poland receives an allowance from the United Kingdom. The foreign allowance is granted under the British Family Benefit Law. As a result, this type of benefit is exempt from PIT in Poland. The taxpayer does not have to submit an annual tax declaration in this respect. Foreign benefits are taxable in Poland, but it is possible to apply a total tax exemption when benefits are granted on the basis of the provisions on family benefits. Considering the issue of taxation of foreign benefits requires examining the provisions of the relevant international agreement and the content of the Polish act on personal income tax. Importantly, from the perspective of the natural person himself, you can take advantage of the statutory tax exemption here.