Return relief - not only for Poles, but also for foreigners

The so-called return relief, which has been in place since the beginning of 2022, can be used not only by Poles returning to the country, but also by foreigners transferring tax residence to Poland. Although there is no shortage of conditions to be met in order to apply the preference, assuming that the maximum amount allowed is used, income of up to more than PLN 340,000 can be exempted. However, due to the draconian penalties that await taxpayers who make a mistake about the right to the relief, extreme caution should be exercised when using it.

With the entry into force of the provisions of the Polish Deal, as of January 1, 2022, the so-called return relief has been in effect in the Polish legal order. At first glance, it might seem that this solution is intended only for Polish citizens returning to the country after a period spent abroad. In practice, however, the relief can also be used by foreigners transferring their tax residence to Poland.

Fulfilling the conditions that allow the relief, a taxpayer may take advantage of an exemption from income taxation up to an amount not exceeding PLN 85,528 in the tax year. Taking into account that the preference applies in 4 consecutive years, income up to the amount of PLN 342,112 can be exempted from taxation during this period.

Who is eligible for the relief?

It is not enough for a taxpayer to merely change his place of residence to take advantage of the so-called return relief. The PIT Law lists in detail the conditions that must be met by a person wishing to apply this preference. The exemption is available provided that the taxpayer:

as a result of the change of residence (after December 31, 2021) will be subject to unlimited tax liability in Poland (i.e. will have tax residence in Poland),
has not previously used (in whole or in part) the so-called return relief,
has a certificate of residence or other document confirming residence for tax purposes during the period necessary to establish the right to the exemption,
did not have a residence in the territory of Poland during the period:
– three calendar years immediately preceding the year in which the transfer of residence to Poland took place,
– from the beginning of the year in which he changed his place of residence in the territory of the Republic of Poland until the day preceding the date of the transfer to Poland.
has Polish citizenship, a Pole’s Card or citizenship of a European Union member state or a member state of the European Economic Area or the Swiss Confederation other than the Republic of Poland.

The last condition may also be considered fulfilled if the taxpayer has been domiciled:

for an uninterrupted period of at least three years in a member state of the European Union or a state of the European Economic Area, the Swiss Confederation, Australia, the Republic of Chile, the State of Israel, Japan, Canada, the United Mexican States, New Zealand, the Republic of Korea, the United Kingdom of Great Britain and Northern Ireland or the United States of America, or
in he territory of the Republic of Poland continuously for at least five calendar years preceding the three-year period.

It is not uncommon for tax preparers to think that withholding tax abroad closes the case and relieves the taxpayer of the obligations arising from earning income abroad in the country of residence. Nothing could be further from the truth. As indicated earlier, such a person is obliged to show the income earned from abroad in the annual return filed in the country of residence.

The above conditions are very important in the context of employees coming from outside the European Union, for example, citizens of Ukraine. For such individuals, the exemption is unavailable – unless, prior to transferring their residency to Poland, they were residents of another EU or listed country for at least 3 years (alternatively, they were Polish residents for 5 years and then residents of a country outside the above list for at least 3 years).

Income subject to exemption

The return relief is governed by the provisions of Article 21(1)(152) of the PIT Law. This preference consists in exempting from taxation income earned by a person transferring his or her place of residence to Poland (i.e. tax residency) up to an amount not exceeding PLN 85,528 in a tax year.

The key point, however, is that the exemption does not apply to all income earned by the person transferring residence. The cited provision contains a closed catalog of exempted revenues. These are revenues earned:

from a business relationship, employment contract, contract work and cooperative employment relationship,
contracts of mandate,
from non-agricultural business activity (taxed both according to the general rules, flat tax and lump sum on registered income),
from maternity benefits.

This means that the exemption does not apply to, among other things, income earned from a managerial contract or contracts for specific work.

Importantly, the exemption applies in 4 consecutive tax years – counting either from the year in which the taxpayer transferred tax residence to Poland, or from the beginning of the following year.

How to use the relief?

A taxpayer entitled to take advantage of the return relief may use the exemption on an ongoing basis (on a monthly basis) or after the end of the year (in the annual return filed).

If he decides to account for the relief during the year, he is obliged to notify his employer by filing a statement. Published by the Ministry of Finance, the new PIT-2 form template includes a section G, through which one can express the desire to take advantage of the return relief on a monthly basis. The taxpayer is also required to indicate the period (years) during which the exemption should be applied in his case. If the employer uses its own formula, it should include in it the employee’s ability to apply the relief.

Failure to report the relevant information to the employer (and failure to use the relief on a monthly basis) does not mean that the amount of the relief will be “forfeited” to the taxpayer. He will be entitled to indicate in his annual PIT return that he is entitled to take advantage of the return relief (e.g. in section C of the PIT-37 form). Then the amount, resulting from the preference, will be returned to him in the form of a tax overpayment from the tax office.

Big benefit, even bigger risk

Bearing in mind the significant benefit that may be derived from taking advantage of the return relief (income of up to PLN 342,112 over 4 years may be exempted from taxation, which, in the case of income from an employment contract, means a tax saving of about PLN 10,000 per year), both returnees and foreigners changing their tax residence to Poland should verify whether it will be possible in their case to take advantage of the preference in question.

However, it should be sensitized that each case should be analyzed individually, since the application of the relief – despite the failure to meet the conditions, which the legislator has provided for quite a lot – will be associated with the necessity of a high tax surcharge. A more relevant issue is that the statement of the right to relief is submitted to the payer under penalty of criminal liability. It is difficult to say why the legislator has provided for taxpayers such draconian liability liability , given that the potential tax benefit (or loss, should the relief be used by an unauthorized person) from the perspective of the state budget is microscopic. As a result, if a taxpayer has any doubts about the possibility of taking advantage of the return relief, he or she should consider settling in an annual return instead of making a statement to the payer. Payers, on the other hand, should especially sensitize employees with regard to this issue

Author: Michał Półtorak