Changing your tax residence is a good way to lower the value of your taxes. In the case of natural persons who have and want to maintain a place of residence in the country, an attempt to optimize tax in this way has a number of life and professional consequences.
What does a change of tax residence mean?
A change of tax residence means that the taxpayer changes the country in which he is obliged to unlimited tax obligation. It is usually caused by the taxpayer’s migration to another country to which he moves his center of life interests (place of residence). In order to define the criteria that determine the conditions for acquiring or losing tax residence in a given country, Polish and international law applies relevant regulations in the field of personal income tax.
The issue of tax residence is similar in most jurisdictions. Uniform international regulations are important from the point of view of settling possible disputes in this respect. It is also worth bearing in mind that national, EU and international tax authorities are gradually tightening their cooperation in order to seal tax systems, which is to prevent tax evasion in general.
Double tax residence
Tax residence should be understood as the obligation to settle taxes on all forms of income and property in the territory of the country in which the taxpayer obtained the tax resident status. In most cases, obtaining the status of tax resident in one country entails the loss of such status in another.
However, there are circumstances where a taxpayer is deemed to be resident in more than one country. This situation may occur in the case of the so-called cross-border workers and in the case of economic migrants who take up work abroad and still maintain their center of personal interests (place of residence) in their country of origin or residence (tax residence).
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In such cases, the relevant double taxation agreements apply. In a situation where such an agreement is missing or the circumstances are more complex, determining the correct country of tax residence may require the assistance of specialists in international taxation of individuals and companies.
How is tax resident status determined?
Tax resident status is determined based on the amount of time that an individual (taxpayer) spends in a given country during the year and on the basis of the taxpayer’s relationship with that country. A relationship is understood here mainly as maintaining the center of life interests (place of residence) in a given country. In Polish law, the status of a tax resident corresponds to the unlimited tax obligation to which natural persons residing in the territory of the Republic of Poland are subject.
These criteria make it possible to decide in which country the taxpayer is obliged to fulfill unlimited tax liability. They can also be used as a mechanism for changing tax residence in the case of people migrating for work and tax optimization.
In the Polish Personal Income Tax Act, Art. 3 specifies in what cases and to what extent natural persons who obtain income in the territory of Poland are obliged to fulfill the tax obligation in our country. The act uses the concept of the scope of the tax obligation, which corresponds to the international definition of tax residence. The act also specifies the criteria on the basis of which the place of residence of a natural person can be determined.
Polish tax residence (tax obligation in Poland)
The Personal Income Tax Act distinguishes between an unlimited obligation (Polish tax residence) and a limited tax obligation in the territory of the Republic of Poland. We can talk about a limited tax obligation, for example, in the case of natural persons who have tax residence in a country other than Poland, and at the same time receive income (income) in Poland.
- Unlimited tax obligation (tax residence in Poland) – natural persons residing in the territory of the Republic of Poland are subject to unlimited tax obligation in Poland. Unlimited tax liability in Poland (Polish tax residence) means that the taxpayer is obliged to pay taxes on all his income (revenues) regardless of the location of the sources of these revenues.
- Limited tax obligation – a limited tax obligation in Poland applies to all natural persons who earn income in the territory of the Republic of Poland, but are not domiciled in the Republic of Poland. Limited tax liability means that taxpayers are obliged to pay taxes in Poland only on revenues (income) obtained in the territory of Poland.
In the case of taxation of natural persons undertaking work abroad, the status of bilateral tax regulations between the country of tax residence (residence) and the country of obtaining income (income) is of great importance. It is worth bearing in mind that many countries have agreed and implemented appropriate agreements on the avoidance of double taxation. Thanks to such an agreement, a change of a natural person’s tax residence is not always necessary in order to use some of the legal methods of tax optimization.
Place of residence according to tax residence status
As mentioned, tax resident status is determined based on the amount of time an individual spends in the country of tax residence during the year and the relationship that they have with that country. The Polish Income Tax Act specifies this issue as the place of residence of a natural person (taxpayer).
A natural person residing in the territory of the Republic of Poland is considered to be:
- a person who has a center of vital interests in the territory of the Republic of Poland or
- a person who stays in Poland for more than 183 days in a tax year.
What is worth emphasizing, each of these conditions is sufficient to recognize Poland as the place of residence of a taxpayer (tax residence).
While the criterion of time in the above definition does not raise any doubts, defining the center of life interests may turn out to be quite difficult. The center (center) of vital interests relates to the private and economic spheres. The already mentioned Art. 3 of the Personal Income Tax Act specifies the center of vital interests as the center of personal or economic interests. The definitions of these terms specify the Minister of Finance’s interpretations and jurisprudence.
Basically a center of personal interest can be defined as:
- center of personal interests – family ties, social, political, cultural, civic activity and affiliation to various types of organizations.
- Center of economic interest – place of business, work or other gainful activity, location of sources of income, investments, property of all kinds, bank accounts, loan servicing, location of the subject of insurance contracts, etc.
These definitions seem to complicate the process of changing the place of tax residence. However, it should be borne in mind that in case of doubt, each case may be the subject of individual interpretation of the Minister of Finance. Moreover, the existing interpretations of the Ministry of Finance are an excellent set of precedents that cover a large range of life cases, in which an apparently questionable change of tax residence of a natural person was recognized and his tax obligation in the territory of the Republic of Poland was limited only to income (revenues) obtained in Poland.
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To sum up, the change of tax residence to a jurisdiction with more favorable fiscal regulations entails the necessity to introduce a number of significant changes in the life of the taxpayer and his family. It is not enough to rent or purchase real estate in a country where you would prefer to pay taxes, as it is not necessary to dispose of all assets in Poland in the event of an actual change of country of residence. It is a serious life decision that has a number of consequences. That is why it is worth using legal tax optimization mechanisms that allow Polish tax residents to conduct business in other countries.
Changing the company’s tax residence or obtaining another one by registering a new LTD company seems to be a simpler solution and not burdened with the consequences of life dilemmas. Moreover, they allow you to take advantage of the advantages of foreign tax residence without the need to transfer your center of vital interests.