German Desk - Tax and Legal advisory
for German investors planning to expand or establish their operations in Poland
What is exit tax?
Exit tax, or tax on unrealised profits, is a tax that affects entities such as those:
- transferring their assets outside of Poland; and/or
- wishing to move their tax residence, with Poland losing the right to tax incomes derived from such assets as a result.
Exit tax, introduced through Poland implementing the EU directive in the Personal Income Tax Act (JL 2023, Item 1130 with amendments; the PIT Act), was initially designed to impact companies only, yet eventually the Polish lawmaker resolved to extend its applicability for individuals. Focused on individuals other than sole traders, exit tax is in fact tax on assets held (and not any income from their actual transfer); the higher the value of the assets held by an individual relocating from Poland, the potentially higher the exit charge. Naturally, assets that are affected are those that cease to be within Poland’s tax jurisdiction as a result of the change of tax residence.
When does exit tax affect an individual?
In 2019 the Polish lawmaker resolved to extend the applicability of exit tax on unrealised profits to include individuals. The PIT Act of 26 July 1991, which sets forth exit tax rules, states that assets of an individual changing their tax residence include items other than those linked with a business activity:
- all rights and duties of a company other than a legal person;
- shares in a company;
- derivative financial instruments; and
- participation units in capital funds.
Exit tax and a change of tax residence
An individual becomes liable to exit tax when they e.g. change their tax residence, namely when the criteria for classifying one as a Polish tax resident are no longer met. These criteria are as follows:
- more than 183 spent in Poland during any tax year; and/or
- their centre of personal and economic relations (centre of vital interests) is located in Poland.
The question therefore is: Will any individual leaving Poland be subject to exit tax?
No, because there are additional time-based criteria that restrict liability to exit tax to taxpayers who were Polish tax residents over a period totalling not less than 5 years during the 10-year period preceding the change of their tax residence. What’s the conclusion? Individuals who visited Poland on a one-time basis, e.g. for one, two, three or four year(s), will not be subject to exit tax unlike persons who have been present in Poland for longer but eventually intend to leave it. Exit tax also affects Poles who have lived in Poland throughout their lives and are now relocating to a foreign country for good.
The materiality threshold is something that remains unclear in the act, which is why it cannot be conclusively stated that the threshold of PLN 4m applies for a change of tax residence. The lawmaker explicitly states that whenever assets are relocated abroad, the threshold does apply; as a result, if the value of the assets thus transferred exceeds PLN 4m, exit tax will be due on the total value of the assets moved. However, the law is silent on any threshold applicable for a change of residence, which is why the risk of tax authorities’ unfavourable interpretation is higher; they may claim that assets below PLN 4m will also carry exit tax if the taxpayer changes their tax residence.
Exit tax affecting individuals and incompatibility with EU law
Administrative courts have repeatedly ruled that the exit tax rules were wrongly implemented in Polish law to the extent that they impacted individuals (cf. our article “The Exit Tax Rules Should Not Impact Individuals”).
Recently, the line of judicial practice has evolved, which can be seen from e.g. the judgement issued by the District Administrative Court in Poznań on 12 May 2023 (I SA/Po 178/23); as the judgement states, the Polish exit tax law, which makes individuals subject to the tax, is not incompatible with EU law. In the reasons section the DAC argues that since the ATAD Directive makes no reference to individuals when it implements exit tax and expressly sets out the requirement to impose the exit charge on corporate entities only, making individuals liable to exit tax is – in the DAC’s view – a matter left to the discretion of a given EU Member State.
This view is shared by the Supreme Administrative Court, which rules (cf. the judgement of 14 January 2022, no. II FSK 12/21) that “making individuals liable to this tax is not harmonised at EU level, so rules of that type are within the EU Member States’ exclusive competence. As a result, the rules cannot be declared to be incompatible with the Directive because it does not make a reference to individuals. Notwithstanding, there are no straightforward obstacles to an EU Member State extending the impact of the exit tax rules for individuals”. If we consider the cited line of judicial practice that now prevails, the exit tax rules should not be ignored whenever an individual considers relocating from Poland.
Amount of exit tax and its due date
The exit tax rate is either 3% or 19% and is determined by whether the so-called tax value is assessed in respect of a given asset or not [1]. In practical terms, the applicable rate will most likely be the higher one.
The assessment base corresponds to the difference between the market value of an asset on which exit tax is chargeable [2] as at the point of a change of tax residence and the tax value (if any) understood as the value not earlier deducted as a tax cost in any form which the taxpayer would have reported as a tax charge had they transferred the asset for consideration.
The deadline within which exit tax should be reported is relatively short. The Ministry of Finance Regulation of 2 August 2023 extends the exit tax payment dates, with the first exit charges due in December 2025. Importantly, the deadline for filing an exit tax declaration has remained unchanged, namely the taxpayer is required to file their declaration within the shorter deadline set out in the PIT Act (i.e. by the 7th day of the month following the month in which an exit tax event occurred) and must remember to pay the exit tax liability within the deadline specified in the regulation.
Risk of detection
Please note that the tax authorities may, using the data available to them (as they know the individuals who meet the 5-year Polish tax residence criterion), determine who may potentially be affected by exit tax. In consequence, at the point when they detect a change of tax residence (no new tax filings in Poland and/or a taxpayer’s notification that he/ she is leaving Poland) they may request the taxpayer, including after they have left the Polish territory, to settle their exit tax liability.
Summary
The Polish exit tax affecting individuals may be considered debatable because the jurisdictions that have extended the exit tax scheme for individuals are few, the reasons being unclear law and relatively scarce judicial practice in the area. As we see it, the broadest category that may be impacted is citizens of other countries who were not aware of the tax at the point when they arrived in Poland (as it might have been before the tax was implemented) or did not pay it safe in the knowledge that they remained unaffected as individuals. Now when years have elapsed and they plan to leave Poland, they are liable to pay exit tax on their assets they had often accumulated before they arrived in Poland. Arrangements governing liability for tax charges with companies that hosted such individuals assigned to work in Poland (or seconded them from Poland to a foreign country) hardly ever address charges of that type, which may imply that an employee is forced to tackle the problem and the extra tax on their own.
