Polish businesses with German partners must understand tax implications, particularly regarding residency certificates and double taxation treaties.
Problem Scenario
A company with a German-resident partner generates income from various sources, including executive compensation, Polish property rental, dividends, employment income, and capital gains.
The partner seeks clarity on how a German tax residency certificate affects Polish taxation of these income streams, considering differing rates and tax forms.
Advice on Tax Implications
Holding a German tax residency certificate allows for the taxation of dividends and capital gains income at a 15% rate, as stipulated in the Poland-Germany double taxation agreement.
Executive compensation is subject to a flat 20% tax in Poland, while rental income from Polish properties is taxed in Poland regardless of residency. Employment income paid by a Polish company is taxed according to standard Polish regulations.
It is recommended to determine the partner’s actual tax residency, obtain the appropriate certificate, and implement any tax changes from the new tax year.
Legal Basis
Relevant legislation includes the Personal Income Tax Act (PIT) articles 13, 16, and 29, as well as the double taxation agreement between Poland and Germany (15% rate for dividends, 20% flat tax on executive compensation).
The Importance of a Residency Certificate
A tax residency certificate confirms in which country an individual is subject to unlimited tax liability. For a partner residing in Germany, this document enables the application of provisions within the Poland-Germany double taxation treaty.
Without a certificate, the Polish payer (the company) is obligated to apply domestic tax regulations. Only with the certificate can preferential rates from the international agreement be utilized.
Lower Taxes on Dividends and Capital Gains with the Germany Agreement
When dividends are paid to a German-resident partner, the double taxation agreement applies, offering two tax rates.
Most partners utilize the 15% rate, contingent upon possessing a valid residency certificate. Without it, dividends are taxed at the Polish rate of 19%, resulting in a significant tax difference, especially for larger amounts.
Similar principles apply to capital gains income, which is treated similarly to dividends under the agreement.
Executive Compensation – A Fixed 20% Rate in Poland
Executive compensation received from a limited liability company is subject to separate regulations. According to Polish personal income tax law, this income is taxed at a flat rate of 20%.
No income tax costs or tax brackets apply. Critically, even possessing a German tax residency certificate does not alter the fact that this income is taxed in Poland.
This is due to both domestic regulations and the international agreement, which specifies that executive compensation is taxed in the country where the company is headquartered.
Rental Income from Polish Property – Taxation Independent of Residency
Income from renting property located in Poland is always subject to taxation in Poland.
This principle is directly derived from the double taxation agreement. Consequently, regardless of whether the partner holds a German residency certificate, rental income is settled in Poland, typically through a flat-rate tax on recorded income (PIT-28).
Tax residency does not affect the place of taxation in this instance.
Employment Contract with a Polish Company – Standard Settlement
Income from an employment contract paid by a Polish company is also subject to taxation in Poland. This applies when the employer is an entity based in Poland.
Exceptions to this rule are limited and primarily concern short-term work performed for a foreign employer. In the analyzed situation, where the Polish company makes the payment, the income is settled under general rules, according to the tax scale.
Double Tax Residency – Risk of Disputes with the Tax Office
A significant practical issue is the possibility of double tax residency. This can occur when a taxpayer meets the residency criteria in both Poland and Germany.
Key factors include:
Polish tax authorities often strive to recognize the taxpayer as a Polish resident, obligating them to tax all their income – including that earned abroad.
Therefore, for individuals earning income in both Poland and Germany, definitively establishing tax residency and appropriately documenting it is particularly important.
Settling Income in Germany – Proportional Deduction Method
An individual with German tax residency is subject to taxation there on all their income, including income earned in Poland.
In such cases, the proportional deduction method is applied. This allows the tax paid in Poland to be deducted from the tax due in Germany.
In practice, this means income is not taxed twice, but requires proper documentation and settlement in both countries.
Changes in Tax Residency – When is it Beneficial?
Analyzing individual income sources reveals that changing tax residency does not always yield clear benefits.
Benefits:
Drawbacks:
Neutral:
Ultimately, the differences often balance out, and the decision to change residency should also consider other income earned abroad and tax risks.
Tax Planning and Individual Interpretations
Experts emphasize that any changes to the taxation method are best implemented from the new tax year, avoiding complications related to corrections and settlements during the year.
Obtaining an individual interpretation is also a good solution, securing the taxpayer’s position and reducing the risk of disputes with tax authorities. This is especially crucial for complex income structures involving multiple income sources and two tax systems.
