If you work in Poland for a Poland-based employer, it is obvious social security contributions should be paid to and income tax withheld by the Polish authorities with respect to the remuneration earned. Having said that, what if you work in Poland for a foreign employer? What about taxing and applying social security contributions to income earned abroad? In which country should you pay the tax and contributions in respect of an employment contract with a foreign employer?
The current market situation borne by SARS-COVID 19 pandemic forced a transformation of the distance working model which has to date been applied in practice. Restrictions on movement made many employees decide on jobs in foreign companies without leaving Poland. Some employees perform their duties abroad, and in the place where their foreign employer is based only occasionally or as per arrangements made by both parties. If that is your case, you must be wondering how to account for the work for a foreign employer.
Taxing income from a foreign employer – personal income tax in Poland
First, let me explain what tax residency is. Very broadly speaking, tax residency is the place of residence for tax purposes, kind of a tax citizenship.
Persons with a place of residence for tax purposes in Poland (so-called residents) have an unlimited tax liability. The liability involves taxing their income (earned both in Poland and abroad) in Poland.
A person with a place of residence in Poland (i.e. Polish tax residents) is a natural person:
- who has a centre of personal or economic interests (so-called centre of vital interests) in Poland or
- whose stay on the territory of Poland exceeds 183 days over a calendar year.
It is enough for you to meet one of the above conditions to be treated as a Polish tax resident under the Polish tax laws.
In finding whether a given person has a centre of personal and economic interests in Poland, Polish tax authorities take account of the following (among other things):
- place of residence of the closest and extended family,
- social ties,
- affiliation with various organisations, political parties, associations and clubs,
- social and political activities,
- source of income,
- investment held,
- bank accounts,
- real property,
- debt incurred (bank specific-purpose loans)
Note: The above mentioned rules apply in the context of double taxation treaties concluded by Poland. That is why, whether you will be subject to unlimited tax liability in Poland or not, should be established on a case-by-case basis.
Poland has concluded over 80 double taxation treaties – a complete list is available on this website (the link redirects to the website of the Polish Ministry of Finance).
Taxing income from a foreign employer – the important thing is where you perform work!
For an employment contract, the double taxation treaties specify a number of major taxing principles. The most important one holds that emoluments, pays and similar remuneration a resident of a given country obtains are taxable in the country of residence, unless the work is performed in another country.
What does it mean in practice? Of paramount importance is where you perform your work.
If you are a Polish tax resident (you live and have your family there) and also work in Poland, you will pay tax on your remuneration in Poland, subject to the Polish principles.
However, if you are a Polish tax resident, but you cross the border and work abroad every day, your remuneration is taxable abroad.
You have concluded an employment contract with a foreign employer based in Germany and you work for them from Poland. Your place of residence for tax purposes is in Poland. In which country should your income be taxed?
The Agreement for the Avoidance of Double Taxation concluded with Germany provides that emoluments, pays and similar remuneration a resident of a given country obtains are taxable in the country of residence, unless the work is performed in another country.
If the work is so performed, the due remuneration may be (and will actually be) taxable in the other country. As such, following the Agreement for the Avoidance, the remuneration for work should be taxable in the country in which the work is actually performed.
If you perform work mainly or exclusively in Poland, then the remuneration you obtain from your German employer will be taxable in Poland only. If you worked both in Poland and in Germany, your remuneration for work would be taxable in proportion to the time worked in a given country.
On the other hand, if you only travelled to Germany occasionally and worked there as part of a business trip lasting a couple of days, the entire remuneration for work would be taxable in Poland.
However, if you are a non-resident (i.e. you have no place of residence for tax purposes in Poland), you are only subject to limited tax liability in Poland. What does it mean? In Poland you should only account for income earned in the territory of Poland. The double taxation treaty concluded with the country of your residence will naturally address the issue in detail.
Important. If you work from Poland for a foreign employer, you should settle your tax matters with a tax office on your own. This means that you have to calculate the tax due every month and remit it to your tax office (tax withholding).
Applying social security contributions to income from a foreign employer
Under the EU regulations, social security contributions are due in the country in which work is performed. Contributions are paid in one EU country only.
If you perform some of your business duties not only in Poland, but, for instance, you have to report to work in the German headquarters once a month, it is necessary to check the time worked in Germany.
If you work only in Poland or you spend more than 25% of your working time in Poland, you will be subject to social and health insurance contributions in Poland only. If you work on a mixed basis and the above percentage is reduced because you start working in Germany only, you will be subject to social security contributions in Germany only.
As a rule, your foreign employer is obliged to pay social security contributions in Poland. The employer will also be obliged to register in Poland as a social security payer.
Applying social security contributions to income from a foreign employer – an agreement to assume the duty to account for the contributions
However, a foreign employer may conclude an agreement with you stipulating that you assume the duty to account for the contributions. You should conclude such an agreement on the date of your employment contract at the latest.
In practice, if such an agreement is concluded, the employer will send you remuneration increased by the portion of contributions they have to pay with their own funds. You, on the other hand, will be obliged to pay the contributions to ZUS [Social Insurance Institution].
The conclusion of an agreement to assume the duty to pay the contributions has no effect on the entity bearing the economic burden of the contributions, i.e., on the employer which remains liable to pay the so-called employer’s contributions. A typical market practice is that the related accounting costs should be incurred by the employer if such an agreement is concluded.
If the employer does not conclude with you an agreement to assume the payment of contributions, they should:
- apply for NIP [Tax Identification Number] in Poland;
- register as a payer with ZUS;
- register you as an employee and pay your contributions.
On its website (link redirects to ZUS website), ZUS provides a step-by-step guide on how to register for social security purposes.
Applying social security contributions to income from a foreign employer – a non-EU employer
Things are slightly different if you have concluded an employment contract with an entity from outside the European Union. In such a situation, the rules for applying social security contributions are slightly different. The worst-case scenario is that you should account for the contributions both in Poland and in the country where your employer is based.
The best alternative is – only the country in which you actually work (e.g. in Poland). The rules for applying social security contributions depend on whether Poland has signed a social security agreement with a given country. It is therefore necessary to check the facts on a case-by-case basis.
Important: Remember that slightly different rules also apply when you are temporarily posted to work in a different country by your Polish employer.
This article provides the basic information on accounting for taxes and contributions in case of a contract with a foreign employer. Remember to always check the double taxation treaty (or an agreement concerning social security) concluded by Poland and the home country of your employer.
Do you have any additional questions on how to account for income earned abroad or do you need additional consultations or accountancy help? You can leave your comment here or send it to me at e-mail address.