International tax reconciliations – is there anything to be afraid of?
The end of the year is the time when taxpayers start thinking about personal income tax reconciliation. For people who are living in Poland permanently, such tax reconciliation is usually not a big challenge. In the case of foreigners, however, problems may arise already at the stage of identifying kind of income and country of taxation.
While preparing tax reconciliations, foreigners usually encounter multiple obstacles. The ignorance of Polish language, ignorance of domestic and international law, receiving income in several countries, mobility during the year – all these factors can go against foreigners.
Therefore, it is already worth preparing for the upcoming tax reconciliation season and acting early enough.
Where are the traps hidden?
In case of international tax reconciliations, traps can appear at everystep. First, the foreigner should determine his tax residence under Polish and international tax law. Once the residence has been established, it is easier to determine what kind of income is taxable in Poland and how the annual tax return should be prepared.
The status depends on the length of stay in the country in a given tax year, as well as the location of personal and economic interests. It is often necessary to compare the status of residence in each country Therefore, it is necessary to analyze tax laws from several countries, what is not always easy.
The second problem that a foreigner needs to determine the income that is subject to taxation in Poland. The problem might arise when income is sourced abroad, and the foreigner is a Polish tax resident.
To properly classify income, it is necessary to analyse the provisions of international Double Tax Treaties, which are concluded between Poland and other countries. These agreements relate to taxation of several kind of income indicating in which country the income should be taxed. The source of income includes income from employment, personal service tasks, rent, interest and dividends as well as capital gains.
In addition, the double tax treaty relates also to appropriate methods of double tax avoidance. It is worth remembering that the content of most treaties is very close to each other, but it is the nuances that differ often cause additional problems.
Another trap is to prepare Polish tax return correctly. Such a reconciliation might be more complicated where an appropriate double tax avoidance is necessary (i.e. exemption with progression method or credit method). It is important to declare income in the right way as it affects the amount of tax due in Poland. Therefore, submission of correct Polish tax return may prevent foreigners from participating in tax audit or paying additional interest for delay in payments.
How to protect yourself from risk?
In practice, there may be even more traps, as all tax implications should be analyzed in relation to a person’s situation. A correct understanding of the tax obligations will therefore reduce the risk of incorrect preparation of the Polish tax return.
Therefore, now we would like to encourage you to familiarize yourself with our articles "PIT for foreigners".
We hope that it allows you to understand the issues related to the preparation of international reconciliations.
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