Change of tax residence and the need to pay tax

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Moving a taxpayer from the territory of Poland to another country is associated with the transfer of the center of vital interests, which in turn causes a change of tax residence. In connection with this phenomenon, which is more and more frequent, it is worth considering whether it implies any tax obligations towards the Polish tax authorities. In this article, we will consider whether the change of tax residence requires the payment of tax.

Exit tax and change of tax residence

The issues presented at the beginning are inevitably related to the issue of the tax on unrealized profits, which is commonly referred to as the exit tax.

First, let us point out that pursuant to Art. 30da paragraph. 2 point 2 of the PIT Act, taxation with tax on income from unrealized profits is subject to a change of tax residence by a taxpayer subject in the Republic of Poland to unlimited tax liability, as a result of which the Republic of Poland loses the right to tax income from the sale of an asset owned by this taxpayer in whole or in part in connection with the transfer of his residence to another country. The tax rate in this case is 19%.

The analysis of the above provision leads to the conclusion that the actual change of tax residence made by a natural person subject to unlimited tax liability in the territory of the Republic of Poland may result in the necessity to pay 19% tax on unrealized profits. However, the condition for the occurrence of taxation is that as a result of such a change, Poland loses the right to impose tax on income from the sale of an asset owned by this taxpayer in connection with the transfer of his place of residence to another country.

It should also be clearly emphasized that the above provision does not only apply to assets related to running a business. This provision will also apply to natural persons who do not conduct business activity and who transfer their private property abroad.

The above thesis is confirmed by the content of Art. 30da paragraph. 3 of the PIT Act, where we read that in the event of the transfer of tax residence, and with it components of personal property (not related to business), only the following assets are subject to exit tax: all rights and obligations in a company that is not a legal person, shares in the company , shares and other securities, derivative financial instruments and participation units in capital funds, if the taxpayer resides in the territory of the Republic of Poland for a total of at least five years in the ten-year period preceding the date of change of tax residence.

As a result, the above provision formulates the next two conditions regarding the possibility of tax arising from unrealized gains.

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Additionally, let us point out that pursuant to Art. 30db paragraph. 1 of the PIT Act, the provisions on taxation do not apply if the total market value of the transferred assets does not exceed PLN 4,000,000.

Summarizing the above, we can indicate that for the occurrence of 19% of tax due to the change of tax residence, the following conditions must be met:

  • a change of tax residence is made by a natural person subject in the Republic of Poland to unlimited tax liability;

  • as a result of a change of residence, the Republic of Poland, in whole or in part, loses the right to tax income from the sale of an asset owned by this taxpayer;

  • Only the following items of personal property are subject to taxation: all rights and obligations in a company that is not a legal person, shares in the company, shares and other securities, derivative financial instruments and participation units in capital funds;

  • a natural person has resided in the territory of the Republic of Poland for a total of at least five years in the ten-year period preceding the date of change of tax residence;

  • the market value of the assets exceeds PLN 4,000,000.

Changing your tax residence may require you to pay tax on income from unrealized gains.However, it should be remembered that in this case it is necessary to comply with the statutory conditions.

Tax on unrealized gains in the context of concluded international agreements

In the context of the considerations so far, we can indicate that taxation will not apply to all private assets of a person changing tax residence. For example, the transfer of motor vehicles or cash will not result in the payment of tax.

The tax may only apply to situations where Poland loses all or part of the right to tax income from the sale of all rights and obligations in a company that is not a legal person, shares in the company, shares and other securities, derivative financial instruments and participation titles in capital funds.

Therefore, let us consider what the said loss of the right to tax the above-mentioned tax by Poland consists of: ingredients. Let us explain this issue on the example of shares in companies that are not legal persons, such as, for example, a general partnership or a civil partnership.

These companies are considered tax transparent on the basis of income tax. This means that the tax on the company's income is settled by its partners in proportion to the right to share in the profits.

In a situation where a natural person who is a shareholder of a company that is not a legal person transfers his tax residence, the company remaining in the Republic of Poland will constitute a foreign establishment for him.

Then, according to the typical provisions of international treaties on the avoidance of double taxation (in most cases it will be Article 13 (2)), the country in which the permanent establishment (non-legal entity) of the non-resident is located has the right to tax the income arising from the sale movable property forming part of the property of an establishment, including profits derived from the transfer of ownership of such a permanent establishment (either separately or with the enterprise as a whole).

The above regulation will also apply to the possible disposal of all rights and obligations of a partner in the company.

As a result, as a result of the removal of a natural person who is a shareholder in a company that is not a legal person, the tax residence will change. Such a person will obtain the status of a non-resident. The company will be treated as a foreign non-resident's establishment located in the territory of the Republic of Poland. Any disposal of all rights and obligations in such a company, under international agreements, will be subject to taxation in Poland. As a consequence, Poland will not lose the right to tax the sale of all rights and obligations as a result of a change in tax residence, therefore there will be no tax obligation with respect to income from unrealized profit.

Such a position was presented by the Director of KIS in the interpretation of November 26, 2020, No. 0115-KDIT1.4011.630.2020.3.MT.

Example 1.

A Polish tax resident is also a partner of a general partnership running a business in Poland. The taxpayer moved permanently to Switzerland, and therefore obtained the status of a non-resident under Polish law. The general partnership that operates in Poland will constitute a foreign establishment for him, and the sale of all rights and obligations in such a foreign establishment, in accordance with the Polish-Swiss agreement, will be subject to taxation in the Republic of Poland. The tax office will not lose the right to tax the sale of an item of personal property in the form of a share in a general partnership, so there will be no exit tax.

Summarizing the findings made, it should be noted that the change of tax residence may actually be associated with the occurrence of tax on income from unrealized gains. However, it should be emphasized that this type of obligation will not arise in every case. Only a detailed analysis of the conditions set out in the PIT Act itself and the content of the provisions of a specific international agreement can give an answer to the question whether a change of residence requires the payment of tax.