Tax residence in terms of employee relocation

This article will answer the following questions:

• What is tax residence and why does it matter when employing staff performing work in the territory of another country?
• How should the term centre of vital interests be understood?
• What are the possible tax implications of relocating an employee to another country?

One of the signs of advancing globalisation is easier access to foreign labour markets and the possibility of hiring qualified employees from other countries. Despite the popularisation of remote work during the COVID-19 pandemic, there are still companies that need specialists on site. For organisational reasons, many employers are therefore offering relocation to their employees. What exactly does this employee transfer involve?

Employee relocation stands for changing the place of residence for professional reasons However, if an employer opts for this solution, they must bear in mind that the move may entail tax implications – e.g. a change of tax residence. 

What is tax residence?

Under Art. 3 sec. 1a of the Polish PIT Act, a natural person is deemed residing in the territory of Poland if: 

• they have a centre of personal or business interests (the so-called centre of vital interests) in the territory of Poland, or
• they stay in the territory of Poland for more than 183 days per tax year (coinciding with the calendar year).

If the taxpayer meets at least one of these conditions, it means that they are a Polish tax resident in a given tax year. 

However, please bear in mind that – pursuant to the systemic interpretation – the centre of vital interests criterion takes precedence when considering the place of residence. 

What is the centre of vital interests criterion?

According to the Tax Explanations of the Minister of Finance of 29 April 2021, the existence of a centre of vital interests in Poland means that a taxpayer has close personal or business ties to Poland. 

Each of these conditions is considered separately and meeting one of them is equivalent to having a centre of vital interests in Poland. 

Personal ties

Personal ties mean the existence of family or social ties, as well as undertaking social, cultural, sports, political activities, etc. In practice, the factor most often taken into account by officials when analysing tax residence in terms of personal ties is whether a given individual’s spouse, partner or minor children reside in Poland.

Business ties

Polish tax authorities assess business ties taking into account the place of conducting business activity, the taxpayer's main sources of income, investments held by them, real and personal property, bank account and loans taken out, as well as the place from which the person manages their property. 

What are the implications for income tax of relocating employees to Poland?

Both employers and employees should remember that establishing tax residence in Poland means that the income earned is subject to tax in Poland in its entirety. If the income is also derived in other countries, there might be a need to refer to the relevant double tax treaty to check whether it is possible to apply any of the methods of avoiding double taxation. 

In order to be able to find out in which country the entire income of a given person should be taxed, the taxpayer's situation should each time be carefully analysed.

Due to the fact that settling PIT may pose a significant challenge (especially where income is derived abroad), we encourage you to reach out to our experienced advisors.