Determination of tax residence in the case of natural persons

Determination of the place of residence is of key importance for the scope of taxation with personal income tax (“ the PIT ”). The Polish personal income tax act (“the PIT Act ”) distinguishes two groups of taxpayers subject to tax liability in Poland. The first group are natural persons having place of residence in Poland. Such persons are subject in Poland to tax liability on the entirety of their income regardless of the location of their sources. Speaking plainly, such persons are called Polish tax residents, and the PIT Act provides that such persons have unlimited tax liability. The second group are natural persons without place of residence in Poland. Such persons are subject in Poland to tax liability only on income generated in the territory of Poland. Speaking plainly, such persons are considered to not have tax residence in Poland, and the PIT Act defines that such persons as having in Poland a limited tax liability.

The above principle has been expressed in Article 3 paragraphs (1) and (2a) of the PIT Act and means that natural persons having a place of residence in Poland (Polish tax residents) are liable to tax, and earlier disclose to the Polish tax authorities, both the income generated in Poland, as well as the income generated in other countries. In turn, natural persons without a place of residence in Poland have a duty to tax, and earlier to disclose, only the income generated in the territory of Poland. The above principles of taxation are applied taking into account the agreements on the avoidance of double taxation concluded by Poland. Depending on the type of contract and sources of income, a taxpayer may apply the appropriate method to avoid double taxation (i.e. proportional tax credit method or the exemption with progression method) which can occur as a result of being subject to unlimited tax liability in one country and to limited tax liability in the other.

Unfortunately, in practice there are doubts whether in the given factual circumstances a natural person is subject in Poland to unlimited or limited tax liability. Ease of travel and immigration policies of individual countries, including freedom of travel and movement in the European Union, cause an increase in labour migration and changes in places of residence beyond the borders of the countries several times a year. In addition, life experience shows that moving to another country is not usually connected with breaking of all the ties with the country of previous residence. In such a situation there arise questions whether or not the move resulted in a change of place of residence for tax purposes.

Solution to this problem can be found in the provisions of Article 3(1a) of the PIT Act and the regulations of the relevant agreements on the avoidance of double taxation. Pursuant to Article 3(1a) of the PIT Act, a person having a place of residence in the territory of Poland shall be a natural person who:

I. has in Poland their centre of personal or economic interests (centre of vital interests), or

II. resides in the territory of Poland for more than 183 days in the tax year.

It should be noted that both of these conditions causing the determination of the place of residence in Poland are disjunctive. It is sufficient to meet any one of them to conclude that the taxpayer has a place of residence in Poland, and consequently, that he is subject in Poland to unlimited tax liability. In addition, the condition of residence in the territory of Poland for more than 183 days in a year does not necessarily mean continuous residence in that amount. It is enough for a natural person to spend in Poland a total of more than 183 days in a tax year.

It is important, however, that the provision of Article 3(1a) of the PIT Act applies mutatis mutandis to the provisions of the relevant agreements on the avoidance of double taxation. In practice, it often happens that a natural person in accordance with the Polish law and the law of the country of which such person for example is a national has a place of residence in both these countries. There is then a problem of double residence for tax purposes. In this situation, it is necessary to apply conflict-of-laws rules contained in the relevant agreement on the avoidance of double taxation, the provisions of which are based on the provisions contained in the OECD Model Convention on the avoidance of double taxation.

If a natural person has two places of residence, OECD Model Convention on the avoidance of double taxation indicates conflict-of-laws rules to determine one place of residence for tax purposes. Pursuant to Article 4(2) of the OECD Model Convention, an individual is a resident of both Contracting States, then his status shall be determined as follows:

I. he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests);

II. if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode;

III. if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national;

IV. if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

The given rules apply in the order determined in the OECD Model Convention. If the application of the first rule does not determine the place of residence of a taxpayer, another criterion should be applied. If this also proved to be ineffective, another criterion is applied.

Both on the basis of the PIT Act and the agreements on the avoidance of double taxation, “centre of personal or economic interests (centre of vital interests)” is one of the most important conditions affecting the determination of the place of residence which settles the tax residence of the person concerned. The Polish PIT Act does not define the term of “centre of vital interests” . In the determination of the place of residence (in Poland) one can refer to the doctrine of the civil law, which developed directives for determining the “centre of vital interests” of the person concerned. In turn, for the purposes of interpretation of the concept of the “centre of vital interests” on the basis of agreements on the avoidance of double taxation, one should refer to the Commentary to the OECD Model Convention. The OECD Model Convention and its Commentary are not a source of universally applicable law, but provide a guide on how to interpret the provisions of agreements on the avoidance of double taxation.

Knowledge of these sources allows to declare that the term “ centre of personal interest s” is construed as the place (country), where a natural person: (i) has the most family and social relations, (ii) undertakes social, cultural, political, civic activities, (iii) belongs to organizations and clubs, (iv) or even pursues a hobby. In turn, the term “ centre of economic interests ” is construed as the place (country), where a natural person: (i) carries out economic activity, (ii) receives other income, e.g. from lease or capital, (iii) has immovable and movable property located there, (iv) has deposits, bank deposits, loans and credits or insurance policies there, (v) pays social security contributions in such country.

Taking into account the above criteria, it must be stated that the determination of the centre of vital interests, which determines the place of tax residence, requires each time an individual assessment and consideration of all factual circumstances indicating with which country a taxpayer has stronger personal and economic relations.

Taxpayers with doubts regarding their tax residence often make applications for the issue of an individual ruling by the Minister of Finance. For example, one can refer to an Individual Ruling of the Minister of Finance of 23 February 2017, No. 1462-IPPB4.4511.1399. 2016.1JK3, in which the Director of Tax Chamber in Warsaw stated that centre of vital interests of the applicant was transferred to Germany not from the day of his move there, but two months later, on the day of the move to Germany of his wife and minor children.

Meanwhile, in the Individual Ruling of 19 October 2016, ref. IPPB4/45111033/162/JK2, the Director of Tax Chamber in Warsaw agreed with the position of the applicant for transfer of his centre of vital interests, and consequently the place of residence for tax purposes along with the move to the United Arab Emirates. In the factual circumstances presented in the application, the applicant pointed out, however, that he has no wife, children or other dependents, does not have any sources of income or assets in Poland, and that before moving out he sold all the financial investments held in the territory of Poland. The applicant also pointed out that he is not an active member of any social, political or cultural organisations in Poland, while in the United Arab Emirates he has a group of friends from studies, and also in this country will conduct his social life.

The above individual rulings also indicate the possibility of division of a tax year. Although the PIT Act and agreements on the avoidance of double taxation do not determine the tax consequences of changing the place of residence during a tax year, the tax authorities seem to unanimously assume that a change of place of residence during a tax year causes the expiry of unlimited tax liability from the date on which there is a change of the place of residence, and not from the last day of the tax year, which for natural persons corresponds to the calendar year. Consequently, for example, a change of tax residence during a tax year of a natural person who had in Poland a place of residence results in the obligation to settle with the Polish tax authorities for the period from the beginning of the calendar year up to the last day on which the natural person had a place of residence in Poland. For this period the taxpayer will be required to disclose and tax any income, generated both in Poland and in other countries. After the move, the taxpayer will be subject in Poland to tax liability only on income generated in Poland.

At the end it is worthwhile to point out that a taxpayer may apply to the competent tax authorities of the country of residence for issue of a certificate of residence, or a certificate of the taxpayer’s place of residence for tax purposes. This certificate, however, documents the past or present state of affairs. This means that it cannot determine the tax residence for the future.