Royalties obtained abroad - settlement method
Common cases include situations in which Polish taxpayers obtain royalties as part of their remuneration received abroad. This mainly concerns the sphere of copyright within computer programs. In this article, we will explain, on the example of granting a license to a computer program by a Polish programmer to an entity from the USA, the rules and method of income tax settlement.
License receivables on the basis of PIT
Deadline "license fees”Does not appear in the Personal Income Tax Act (PIT Act), therefore taxpayers may have problems with the correct classification of this income to the appropriate source. In order to explain what a license is, please refer to the content of the Act on Copyright and Related Rights. Pursuant to Art. 17 of this Act, unless the Act provides otherwise, the author has the exclusive right to use the work and dispose of it in all fields of use and to remuneration for the use of the work. However, pursuant to Art. 41 sec. 1 point 1 of the act, unless the act provides otherwise, economic copyrights may be transferred to other persons by inheritance or on the basis of an agreement. According to Art. 41 sec. 2 of the Act, an agreement on the transfer of proprietary copyrights or an agreement for the use of a work, hereinafter referred to as "license”, However, it includes the fields of exploitation clearly listed therein.
In the light of the above, granting a license is an authorization to another person to use a given work (work), but without transferring the copyright to the user. The creator does not transfer his rights to another person, but only authorizes him to use the good in a specific way, at a specific time, for an appropriate remuneration in the form of the aforementioned royalties.
It can therefore be concluded that royalties are copyright revenue. When transferring this to tax law, it should be noted that pursuant to Art. 10 sec. 1 point 7 of the PIT Act, the sources of income are cash capitals and property rights, including the sale of property rights against payment. The wording of Art. 18 of the PIT Act states that the income from property rights is considered in particular, income from copyrights and related rights within the meaning of separate regulations, rights to inventive designs, rights to the topography of integrated circuits, trademarks and decorative designs, including paid sell these rights. In the light of the personal income tax, the revenue from royalties is revenue from copyrights.
Royalties under an international agreement
It should not be forgotten that according to Art. 4a of the PIT Act, we apply Polish regulations taking into account ratified international agreements. Referring to the example of an IT specialist who licenses his program to a US client, it is necessary to analyze the content of the Polish-American agreement on the avoidance of double taxation and the prevention of tax evasion in the field of income taxes, signed in Washington on October 8, 1974.
Pursuant to Art. 13 above royalties and royalties arising in one Contracting State and paid to a resident of the other Contracting State shall be taxed in that other Contracting State. Such receivables may also be taxed in the state in which they arose, and in accordance with the law of that state, but the tax thus collected may not exceed 10% of the gross amount due. Royalties shall be deemed to arise in a Contracting State only when they are paid in connection with the use or right to use property or rights in the territory of that Contracting State. Term "license fees"Means, inter alia, all kinds of fees that are paid for the use or right to use any copyrights for literary, artistic or scientific works, including copyrights related to films and audio tapes used by radio stations and TV stations, patents, trademarks, designs functional and decorative, documentation, formulas, production technology, information on industrial, commercial or scientific-research experiences or skills (know-how).
Let us translate the above provisions - quite complicated - into the issue that is the subject of this article. Cited Art.13 of the agreement expressly states that any remuneration paid for the right to use copyrights constitutes license fees. Consequently, this group also includes the granting of a license to a computer program. It is also important to establish in which country royalties arise. This takes place in the country where the copyright is used, i.e. in the present case it will be the USA. However, according to the general rule, license fees arising in the USA and paid to a person residing in Poland will be taxed in Poland. Such debts may in any event also be taxed in the country in which they arose (USA) and under the law of that state, but the tax so levied may not exceed 10% of the gross amount owed.
As a consequence, we come to a situation where there is a double tax on royalties. It will be both Polish income tax, paid in the country of residence, as well as American tax not exceeding 10%, paid in the country of the source of income.
In order to eliminate this unfavorable phenomenon, an appropriate method of avoiding double taxation should be applied. In the case of the Polish-American agreement, it is a method of proportional deduction. Pursuant to Art. 20 paragraph 1 of the agreement, in accordance with the provisions of Polish law and subject to the limitations provided for therein (subject to changes made without violating the basic principles), Poland will allow a person residing or having a registered office in Poland to deduct the appropriate amounts of taxes paid in the United States against the taxes due in Poland United. Royalties are taxed both in Poland and in the USA. However, in order to avoid double taxation, the Polish-American agreement provides for a credit method. Start a free 30-day trial period with no strings attached!
The method of settling the tax on foreign royalties
Shifting the above into the case we have just mentioned, it should be pointed out that the Polish programmer will pay both the income tax in Poland, on general terms, and the withholding tax in the USA, according to the 10% rate. However, he will be able to deduct the tax paid in the USA from the Polish tax.
It is worth pointing out that the revenues obtained from copyrights (including licenses) do not require the payment of monthly tax advances, which means that the Polish taxpayer settles only in the annual tax return.
The equivalent of the described method of avoiding double taxation is Art. 27 sec. 9 of the PIT Act, in which we can read that if a taxpayer residing in the territory of the Republic of Poland also obtains income from activities performed outside its territory or from sources of income located outside its territory, and the double taxation avoidance agreement does not constitute the application of the method referred to in paragraph 8, or with the country in which the income is achieved, the Republic of Poland has not concluded an agreement on the avoidance of double taxation, this income is combined with income from sources of income located in the territory of the Republic of Poland. In this case, an amount equal to the income tax paid in the foreign country is deducted from the tax calculated on the total amount of income. The deduction may not, however, exceed that part of the tax, computed before the deduction is made, which is proportionately attributable to the income obtained in the foreign country.
The tax paid abroad should be included in part H of the PIT-36 tax return in the line "Tax paid abroad - in accordance with Art. 27 sec. 9 and 9a of the Act (converted into zlotys)”. The settlements of income tax on foreign royalties are made by a Polish tax resident in the PIT-36 tax return submitted by April 30 of the year following the tax year. In this declaration, he reduces the Polish tax liability by the US tax withheld at source. Summarizing this analysis, it should be emphasized that royalties constitute a category of income subject to withholding tax, i.e. in the country where the use of the granted license takes place. This causes a situation of double taxation: both in the country of tax residence and in the country where the income is generated. To prevent this from happening, use a credit method that allows foreign tax to be deducted in your tax return.