It seems that natural persons find themselves in an easier personal situation when changing their tax residence than companies. Basically, all you have to do is to make a decision which may not be easy, but once you have made it, it is enough to pack up and even if you may not find this enjoyable, once you have packed up and left, there is no need to do anything else. And yet, it turns out after a while that the two countries may persecute you for taxes! Make it your priority to examine all the aspects of relocation in practice, especially the issue of dual tax residence. After all, you would not want to pay taxes in two countries!
According to our experience, natural persons run a much higher risk of having dual residence than companies. This is mainly due to the fact that human life is much more complicated than corporate one and consists of many components, such as family connections. Whether your partner or spouse and children are willing to move along with us is of huge importance. What if they do not want to move? This question is significant when it comes to proving that the so-called centre of vital interests is outside Poland.
HOW TO AVOID FALLING INTO THE TRAP OF DUAL RESIDENCE?
The centre of interests is divided into two extremely important elements in the context of tax residence: the centre of personal interests and the centre of economic interests. They are both equally important. What does it mean and how to manage it? Since practical examples are more comprehensible than plain tax regulations, we have decided to present real-life situations which are likely to happen and which represent the most common mistakes committed while moving abroad, resulting with in the emergence of dual tax residence.
I. DUAL TAX RESIDENCE AND THE SALE OF CRYPTOCURRENCIES IN FOREIGN COUNTRIES.INSPECT WHETHER YOU HAVE ACQUIRED ANOTHER RESIDENCE WITHOUT SEVERING TIES WITH POLAND
Do you make any investments in cryptocurrencies? On an industry forum, you came across information according to which the NHR (Non-Habitual Resident) status in Portugal allows you to cash cryptocurrencies into FIAT money without taxation. Not giving it too much thought, you find a company in Portugal which helps you with all the formalities and even provides you with a Portuguese address required for your documentation. Within a few weeks you obtain the NHR status, even though you appear in Portugal for only a week. After all, you have numerous obligations, several prosperous companies and real estate in Poland, you are in no mood for relocation. All you have to do is to cash in the crypto and reinvest the money. You may invest it in real estate, a car or maybe you will pay back the loans you have taken out. Everything begins to fall apart when the Polish tax authorities investigate your funds for these purchases, as they do not result from the revenues declared so far in the Polish Personal Income Tax declarations. After presenting the NHR certificate it suddenly turns out that you are a Polish tax resident, as your centre of personal and economic interests is situated in this country. It is also worth mentioning that since you have the NHR status in Portugal, the government of this country wants to tax your global income just as well.
The above situation demonstrates that the rules for obtaining tax residence are not so clear-cut. Obtaining tax residence in one country does not automatically result in losing the previous tax residence.
It cannot be excluded that you will find yourself in a situation where, on the one hand, you possess tax residence in one country, but you declare income in both, not settling your tax as a tax resident – on your global income – in either of them. Given the increasing exchange of fiscal information between countries, such situations will become increasingly rare. Nevertheless, currently such situations are still possible, and nothing happens until a given authority obtains information on undeclared income in another country. However, when tax authorities detect such income and its origins, it may turn out that there occurs dual tax residence and both countries will want to increase their revenues. Under the mutual agreement procedure, a tax residence will be established in one of the countries. However, this procedure is time-consuming and, unfortunately, in the end it will be necessary to declare global income in one country and most likely pay tax surcharge, as well as interest. Especially if you are recognised as resident in a country with a higher tax burden.
Of course, you may have a tax residence certificate, but you have to be aware of the fact that this serves only as evidence of certain circumstances. Such a document is certainly important, but it may not be sufficient. Upon issuing a certificate of tax residence, the authorities usually limit their actions to verifying the fulfilment of certain conditions of a given country rather than to examining the overall situation of the taxpayer.
Based on our example, a taxpayer would probably be deemed to be resident in Poland
with the need to declare and tax income from cryptocurrencies, the taxation of which
is unregulated in Portugal. When changing your tax residence, however, you should think globally about your income. Just because in Portugal a taxpayer with the NHR status will not be taxed on cryptocurrencies, or the income from dividends or real estate will be exempt does not mean that overall tax savings will be achieved. Income from real estate still has to be accounted for in Poland – in a similar way as for residents, tax at source will be deducted from the dividend paid by Polish company – admittedly not 19% but 15% – yet this saving can be easily consumed on the sale of shares, which is taxed at 28% in Portugal – which in comparison to Polish 19% can be highly burdensome.
II. EMPLOYMENT IN SWITZERLAND AND THE 30-DAY RULE – ATTENTION TO DUAL RESIDENCE
You are offered a lucrative contract in Switzerland, initially for five months. You find that there is no point in rearranging the life of the whole family, changing the children’s school, the wife’s job. They stay in Poland, you go abroad. Switzerland is not far away, so, every few weeks, you return to your family for an extended weekend. It turns out that you have accidentally became a tax resident in Switzerland because of the length of your stay (more than 30 days for business purposes), and at the same time you remain a tax resident in Poland.
This situation may arise from the fact that each country is free to determine who it considers to be its tax resident. In most countries, it is the length of stay that matters, in addition to the permanent place of residence or centre of vital interest. Most often, the limit on the length of stay is set at 183 days, but Switzerland or Cyprus can be examples showing that this might not have to apply, as Switzerland permits the acquisition of tax residence after only 30 days, and Cyprus after 60 days. Another problematic issue is that countries adopt different rules with regard to the period in which the duration of stay is counted. In most cases it is the calendar year, but sometimes it can be a period of twelve consecutive months e.g.: the UK counts the period between 5 April and 4 April of the following year and Croatia looks at 2 tax years. With frequent travelling, another interesting issue comes into the equation. Namely, most countries apply the principle of physical presence in the country while calculating the length of stay. This means that any part of a day, the day of arrival or the day of departure, counts towards this period (of stay in a given country). That is why, every full day spent outside the country is not considered. On the other hand, any part of a day, however short, spent by a taxpayer in a given country counts as a day of presence in the country. This is the case, for example, in Poland. This can lead to a situation where in one year, which has 365 days for the purpose of determining residence, a taxpayer has spent more than 183 days in two different countries.
III. LIVING IN SPAIN – FAMILY, CHILDREN’S SCHOOL, HOUSE FOR RENT – AND BUSINESS ACTIVITY IN POLAND
You move with your family to warm Spain. My husband has a job there and children their school. You have a long-term rented house there, you find friends, you get involved in the local community through your children. Everything seems to be good, but in parallel, you run a business in Poland. You manage it partly from Spain, but some of the activities require, at least for a few days a month, your supervision on site in Poland. You also leave a flat in Poland which you bought on credit and want to rent it out on Airbnb while you are away. You also hold shares in several Polish companies, in one of which you are even the president and receive a salary. You do not want to abandon it all for the moment and get rid of your source of income – after all, living in Spain does not come cheap. You reconcile everything with regard to organisation…… and you just fall into the trap of dual residence. Why?
You become a tax resident in Poland if you have a centre of personal or economic interest in the territory of Poland. The fulfilment of either of these is sufficient to conclude that the taxpayer has a centre of vital interests in Poland. Therefore, when you move abroad, you should ensure that your centre of economic interests is also moved there. When it comes to economic emigration, this is essentially a self-fulfilling criterion. If the change of residence is determined by other considerations, it is worth taking a closer look at this condition. Under no circumstances do we wish to encourage the severing of all economic ties with Poland, particularly as this is not always necessary, justified or even possible. Changing the tax residence, some of the economic ties can be still severed without sentiment, e.g., by cancelling credit cards, closing unnecessary bank accounts, or subscriptions. Sometimes this may be a good reason to take stock of your liabilities and give rise to positive changes in this area. At the same time, it is worth starting to build economic ties with the new territory. To start with, these may be small things: a bank account, a telephone subscription, maybe buying an inexpensive car or health insurance on the spot. Over time, as part of getting familiar with the new realities, there will probably appear economic ties on the revenue side: bank deposits, orders for local companies or dividends from shares in a capital company. All this can be planned and realizing the risks in this area is the first step in this direction. The income from the territory of Poland itself can also be reorganized so that it is not associated with Poland, but with the country of the new residence.
IV. VACATION, REMOTE WORK – UNTIL YOU DO NOT EVEN KNOW WHEN YOU LIVE IN A NEW COUNTRY. SO, PAY YOUR UTMOST ATTENTION TO FAILURE TO COMPLETE ANY FORMALITIES!
You are going on a well-deserved long vacation to Tenerife. You enjoy the advantages of the spot where you are staying. You like the place so much that you decide to extend your stay a bit. The pandemic demonstrated that remote work is possible, so you stay where you were, while working for a Polish employer. Six months go by, you do not even notice when. In the meantime, you set up a bank account, rent an apartment for a long period of time and buy a car. Your family, friends from social media, maybe your supervisor at work, with whom you shared a view of the beach during a conference call, know about your stay in Tenerife. However, it turns out that your departure is completely unknown to the accountant of the company for which you work, the Polish bank in which you have an account, Social Insurance Institution, the Tax Office filling the post box in the apartment you previously rented in Poland with successive advice notes. At the beginning of the next tax year, you receive the PIT-11 tax certificate form from your employer and you realize that you do not know what to do with it.
It is clear that when going on vacation, few people intend to stay there forever straight away. However, when plans start to clarify, it is worth making sure that you know where you hold a tax resident status and to reconcile the factual state with the documents. Although few people know about it, there is an obligation to report your departure or change of the address of residence to the authorities. Due to the lack of sanctions, it is not enforceable. Nevertheless, it is worth taking a pragmatic approach: the first thing the authority reaches for when determining the residence is documents. The documents should indicate when you left Poland with the intention of permanent residence.
The second point is the delivery of correspondence. The authority will serve letters to the last known address of residence of the taxpayer. Uncollected correspondence is subject to the so-called deemed-delivered effect, so after 14 days from the first attempt of serving some mail, it is considered to have been served to the addressee and has such effects for the taxpayer as if they had received it.
In this example, there is another side of the coin. The carelessness of an employee who has not informed the employer that they live and work in the territory of another country may create a serious risk on the part of the employer, both in the area of the payer of taxes and insurance premiums on the remuneration of such an employee, up to the risk of creating a foreign tax establishment of the company abroad, but today it is not our concern…
Each of us is different, some will move to the other end of the world overnight, others need to plan everything before taking the first step. Also, the change of residence can be different, sometimes it “happens” by itself and results from life circumstances, at other times it is cold calculation and pure mathematics. Nevertheless, we encourage you to think about the inevitable taxes as you change your place of residence. As the old saying goes, “prevention is better than cure” – by paraphrasing we will say “better to plan a change of residence than to waste time, nerves and money battling with the tax office”. And we recommend the Wealth Advisory channel on the rules related to the change of residence. Anna Maria Panasiuk, available on YouTube, Spotify, Apple Podcast.
Tax explanatory notes of 29 April 2021. Tax residence and the scope of tax liability of natural persons in Poland