Relief for young people and foreign income
The introduction of the allowance for young people to the PIT Act was assessed very positively. It is certainly a positive change for taxpayers. At the same time, it should be noted that this new exemption raised many practical problems as to the correct tax settlement. One of such issues is the influence of foreign income on the possibility of applying the allowance for young people.
Relief for young people - rules of application
The exemption in question has been in force since August 1, 2019 and has been regulated in Art. 21 sec. 1 point 148 of the PIT Act. This provision states that income from the service relationship, employment relationship, homeworking, cooperative employment relationship and mandate contracts referred to in art. 13 paragraph 8, received by the taxpayer until the age of 26, to an amount not exceeding the amount of PLN 85 528 in the tax year.
Moreover, pursuant to Art. 21 sec. 39 of the PIT Act, when calculating the amount of revenues subject to tax exemption pursuant to para. 1, paragraph 148 does not take into account the income taxable with a flat-rate income tax, income exempt from income tax and income, from which, on the basis of the provisions of the tax code, the collection of tax was abandoned.
An analysis of the above provisions leads to the conclusion that, contrary to popular opinion, the exemption for young people does not apply to all income. The scope of the exemption covers only income from the employment relationship, employment relationship, homework, cooperative employment relationship and mandate contracts that are concluded with natural persons conducting business activity, legal persons and organizational units without legal personality, except for revenues obtained on the basis of contracts concluded as part of non-agricultural business activity conducted by the taxpayer.
As a result, it can be indicated that the relief for young people will not be applied, inter alia, revenues from business activity, revenues from a specific task contract, revenues from copyrights, revenues from commission contracts concluded with persons who do not conduct business activity or revenues from commission contracts concluded by the taxpayer in the scope of his economic activity.
At the age of 25, the taxpayer runs a business. In the scope of this activity, he concluded a contract of mandate with another entrepreneur. The income generated in this way does not benefit from tax exemption under the tax relief for young people. It should be remembered that the youth relief does not apply to every income, but only to the income defined in Art. 21 sec. 1 point 148 of the PIT Act.
Limiting the use of youth relief
It should be emphasized that the relief for young people is limited not only in terms of types of income, but also in terms of the set limit. If the taxpayer's income exceeds the limit of PLN 85,528 during the year, an obligation to settle the tax and submit a tax return arises. In this case, the tax will be applied to the surplus above the indicated limit.
In the light of the above, it is very important to determine which revenues generated by a young taxpayer will be included in the limit and which ones remain outside the scope.
It is worth noting that Art. 21 sec. 39 of the PIT Act indicates directly that income tax-exempt is not included in the allowance limit for young people. The exemption of income under the youth relief requires an analysis of the income obtained in the tax year, which falls within the exemption limit of PLN 85,528.
Settlement of foreign income
A taxpayer who is a Polish tax resident is burdened with unlimited tax liability, which means that he is obliged to settle all income in the country, i.e. those obtained both in Poland and abroad.
It is possible that foreign income will also be taxed in the source country, which may result in the taxpayer being obliged to pay double tax. In order to eliminate this unfavorable situation, an appropriate method of preventing double taxation is used. The international agreements concluded by Poland distinguish the method of exclusion with progression and the method of proportional deduction.
Both of the above methods are also presented in the Polish Personal Income Tax Act (PIT Act).
The method of exclusion with progression is described in Art. 27 sec. 8 of the PIT Act. It is stated there that: "if a taxpayer who is a tax resident, in addition to taxable income, also obtained income from activities performed outside the territory of the Republic of Poland or from sources of income located outside the territory of the Republic of Poland, exempt from tax on the basis of double taxation agreements or other international agreements, the tax is defined in following way:
- to the income taxable with income tax, the income exempt from this tax is added and the tax is calculated from the sum of these income according to the scale specified in paragraph 1;
- the interest rate of this tax is set to the sum of income calculated in this way;
- the interest rate determined in accordance with point 2 is applied to the income subject to income tax”.
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The method of proportional deduction is described in Art. 27 sec. 9 of the PIT Act. The provision states that: “jIf a taxpayer who is a tax resident also obtains income from activities performed outside the territory of the Republic of Poland or from sources of income located outside the territory of the 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. This deduction may not, however, exceed that part of the tax calculated prior to the deduction which is proportionately attributable to the income obtained in a foreign country.”.
However, the most important information resulting from the above provisions is the fact that in the case of the method of exemption with progression, foreign income in Poland is tax-free. However, this will not be the case if we apply the method of proportional deduction to foreign income. Although both methods offer the possibility of avoiding double taxation, only in the case of the exemption with progression method is foreign income tax exempt.
The method of avoiding double taxation and relief for young people
Taking into account the content of Art. 21 sec. 39 of the PIT Act, we can indicate that when calculating the amount exempt under the exemption for young people, foreign revenues that are exempt from tax in Poland are not taken into account.
Consequently, foreign revenues that are accounted for under the exemption with progression method will not be taken into account when calculating the exemption limit.
In 2021, the young taxpayer achieved income from an employment relationship both in Poland and in France. The amount obtained in Poland is PLN 60,000, while the amount obtained in France is PLN 40,000. The exemption with progression method applies to wages earned in France. Consequently, French income does not count towards the exemption limit. The taxpayer in its entirety can apply the youth relief when it comes to revenues in 2021.
If, on the other hand, foreign income is accounted for on the basis of the proportional deduction method, it is taxable in Poland and should be taken into account when calculating the amount of income exempt under the exemption for young people. At the same time, the taxpayer may decide on the method of using the tax relief, and thus independently decides whether domestic or foreign income will be exempt.
In 2021, the young taxpayer achieved income from an employment relationship both in Poland and in the Netherlands. The amount obtained in Poland is PLN 60,000, while the amount obtained in the Netherlands is PLN 40,000. There is a pro-rata deduction for earnings earned in the Netherlands. The sum of the revenues is therefore PLN 100,000. Only the amount of PLN 85,528 is exempt, the surplus over this amount will be subject to taxation. Only foreign income, for which the method of proportional deduction is applied, counts towards the limit of the allowance for young people.
Summarizing the above article, it can be indicated that the youth relief applies to both domestic and foreign revenues. Importantly, depending on the method of avoiding double taxation, a young taxpayer will count foreign income to the limit (proportional deduction method) or not (method of exemption with progression).