Employee relocation in practice – tax aspects and more (part 1). A few words on tax residence

Katarzyna SADOWSKA
Tax Supervisor at RSM Poland

The consequences of economic development include investments of foreign entities in Poland as well as investments of Polish entrepreneurs abroad. Many foreign companies benefit from the abundant resources of well-educated and experienced Polish specialists, whereas Polish investors seek employees with adequate qualifications on foreign markets. As a result, the number of Polish employees employed in foreign entities, as well as foreign employees employed in Polish companies, is growing significantly. Specialists can provide their services from any place in the world (working remotely), often on the territory of more than one country.

Thus, it becomes unclear where the taxable income should be declared and in which country the employee should be registered for social insurance. To answer these questions, we have prepared a series of articles to discuss crucial issues related to the relocation of employees, if and where they are subject to full tax liability and consider other legal aspects, relevant to both employees and foreign employers.

In the first article we are going to focus on the correct determination of the so-called employee’s tax residence and its implications.

What is tax residence?

Tax residence is the place of residence for tax purposes in a given country. Under tax legislation, an individual has a place of residence in Poland if:

1. they have the so-called centre of vital personal or economic interests in Poland or
2. they reside on the territory of Poland longer than 183 days in any fiscal year (which, as a rule,  corresponds to the calendar year).

It is sufficient that either condition is met. While the latter seems quite clear, the exact meaning of the “centre of vital interests” may be confusing.

What is the centre of vital interests?

A centre of vital interests is a place to which an individual is closely attached, personally and economically, this includes having a family and friends, any political, cultural as well as gainful activity, financial background, investments, immovable as well as movable property, insurance policies, loans, bank accounts, etc.

To determine the centre of vital interests, we should take into account a number of aspects, such as: the place of residence of the closest family (spouse, children), location of property (e.g. real estate), or place of activity.

Why is it crucial to determine tax residence?

If a person has tax residence in Poland, they are also subject to full tax liability here. It means they must declare and tax all their income in Poland, both generated in Poland as well as abroad (including remuneration for work).

This sometimes leads to a situation when the same income would be subject to double taxation, i.e. in the country of residence and in the country in which the income was earned. Taxation of the same income (e.g. remuneration for work) in two countries is, however, eliminated thanks to international treaties concluded by Poland with other countries, which include provisions determining the place where the remunerated work performed in another country (party to the agreement) should be taxed. We will focus on double tax agreements in the next article so stay tuned for more updates!