0 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. AmCham Tax Session Warsaw, Poland Wednesday, November 15th 2006 AmCham Tax Session Warsaw, Poland Wednesday, November 15th 2006 I N T E R N A T I O N A L E X E C U T I V E S E R V I C E S T A X Personal income tax – 2007 New residence rules and associated expatriate issues Presented by: Andrzej Marczak, Partner, doradca podatkowy Jan Jodłowski, Senior Manager, radca prawny Mateusz Kobyliński, Senior Manager, doradca podatkowy

1 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. OVERVIEW 1. Tax residence in Poland Current rules vs. changes for Other key changes affecting expatriates

2 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. ACT AMENDING THE PIT ACT Passed by Sejm on 27 October 2006 Resolution of the Senate introducing amendments passed on 9 November 2006 Sejm shall debate the Senate’s amendments between 14 and 18 November 2006 The President should sign the act and it must be published by 30 November 2006

3 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. TAX RESIDENCE – 2006 vs. 2007

4 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. ESTABLISHING TAX RESIDENCE General rules: Unlimited tax liability – place of residence in Poland. World- wide income is subject to tax in Poland regardless of where the source of income is located. Limited tax liability – no place of residence in Poland. Only income from Polish sources is subject to tax in Poland. Place of residence abroad not needed?

5 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. ESTABLISHING TAX RESIDENCE Place of residence for tax purposes Definition of a place of residence according to Polish regulations (?) Intention of a permanent stay; Physical presence; Question of registration (meldunek).

6 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. ESTABLISHING TAX RESIDENCE Place of residence for tax purposes Entirety of circumstances connected with particular individual; House/apartment, family, employer, property, social, economic, and cultural connections; Every case should be assessed individually; Permanent residence card; Work permit, contracts.

7 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. ESTABLISHING TAX RESIDENCE – 2006 Practice of tax authorities: Requesting a foreign tax residence certificate Exchange of information with foreign tax authorities US expats: US tax residents: automatically non-resident in Poland?

8 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. TAX RESIDENCE - NEW RULES FOR 2007 General rules: Unlimited tax liability – place of residence in Poland. World-wide income is subject to tax in Poland regardless of where the source of income is located. Limited tax liability – no place of residence in Poland. Only income from Polish sources is subject to tax in Poland: - income from work performed in Poland regardless of where paid, - income from personal services performed in Poland regardless of where paid, - income from business activity performed in Poland regardless of where paid, - income from the real estate in Poland (including income from sale)

9 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. TAX RESIDENCE - NEW RULES FOR 2007 Definitions: An individual having a place of residence in Poland: - centre of vital interest in Poland (centre of economic OR personal interest), OR - duration of presence in Poland more than 183 days in a year. An individual NOT having a place of residence in Poland: - centre of vital interest not in Poland (centre of economic OR personal interest) and duration of presence in Poland less than 183 days in a year, OR - foreign certificate of residence if duration of presence in Poland more than 183 days in a year.

10 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. TAX RESIDENCE - NEW RULES FOR 2007 Issues of concern: Implications for individuals Civil Code definition no longer applicable? Obtaining foreign certificates of residence Migrating residence Course of action to be taken - solutions

11 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. TAX RESIDENCE - NEW RULES FOR 2007 Implications of becoming a resident: change of tax office taxation of world-wide income in Poland no possibility of applying preferential flat rate of 20 percent

12 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. TAX RESIDENCE - NEW RULES FOR 2007 Civil code definition vs. new definition in PIT regulations: Should not be directly applied – tax regulations now include a definition of an individual having a place of residence in Poland Criterion of ‘intention’ now effectively replaced by ‘centre of vital interest’ Definition of what a ‘centre of vital interest’ is: centre of economic OR personal interest Application of double tax treaty definitions?

13 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. TAX RESIDENCE - NEW RULES FOR 2007 Foreign certificates of residence: Possibility of obtaining a certificate of residence in a foreign jurisdiction No double tax treaty with country of residence = problem

14 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. TAX RESIDENCE - NEW RULES FOR 2007 Migrating residence: Possibilities? Neighbouring countries:  Slovakia  Baltic states  Ukraine  Germany

15 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. TAX RESIDENCE - NEW RULES FOR 2007 Escaping Polish tax residence: Maintaining a centre of vital interest not in Poland and remaining in Poland for less than 183 days, Obtaining a certificate of tax residence from a country with which Poland has a DTT

16 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. TAX RESIDENCE - NEW RULES FOR 2007 Choosing a country to obtain a certificate of residence: If credit method is applied under DTT - country with lower tax rate is preferable If exemption with progression method is applied under DTT – level of tax rate should not make a significant difference

17 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. TAX RESIDENCE - NEW RULES FOR 2007 What if one becomes a resident in 2007? non-resident in 2006: only Polish source income is taxable in Poland 20 percent tax on management board fees, civil law contracts etc. resident in 2007: no action – becomes subject to progressive taxation civil law contract – effectively up to 32 percent tax (except management services) business activity – election for 19 percent rate transfer of copyrights – 50 perent costs of earning income

18 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. TAX RESIDENCE - NEW RULES FOR 2007 Other options: Offshore structures – e.g. Cyprus Advance payments in 2006 Loan / bonus schemes In-kind supply of shares

19 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. FILING REQUIREMENTS 2007

20 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. FILING REQUIREMENTS Foreign employment income: Monthly compliance obligations No tax returns Calculations and payments Documentation?

21 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. FILINGS Changes: Monthly tax advance payments without a declaration  no more PIT-4, PIT-8A, PIT-53 Annual group declaration to be filed by tax remitters (e.g. employers) by the end of January of the following year Annual individual information forms (PIT-11/8B) – no changes Deadlines for payments unchanged

22 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. SALE OF REAL ESTATE

23 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. SALE OF REAL ESTATE To date: Taxable if property is sold within 5 years from the end of the year during which it was acquired 10 percent tax on proceeds from sale Exemption - declaration of using funds to acquire other property in Poland within 2 years Costs of transaction deductible Applicable to property acquired before 1 January 2007

24 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. SALE OF REAL ESTATE 2007: Taxable if property is sold within 5 years from the end of the year during which it was acquired 19 percent on income from sale Costs of acquisition deductible Exemptions – ‘meldunek’ for 12 months prior to sale (if sold within five years) Applicable to property acquired after 1 January 2007

25 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. NEW CONCESSIONS

26 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. NEW CONCESSIONS 2007: child deduction – PLN 120 per child deductible from tax 1 percent payments to organisations for advancing the public good now executed via tax office 30 percent of statutory per diems for individuals deriving income for work outside Poland

27 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. OTHER CONCESSIONS Changes: Alimony payments exempt:  for chlidren up to age 25  for other persons up to PLN 700 per month

28 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. RESCINDING OF CONCESSIONS Some concessions will no longer apply: Exemption of income from the sale of real estate acquired in the form of inheritance or donation Deductibility of interest on mortgage loans

29 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. NEW TAX SCALE

30 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. TAX SCALE FOR 2007 Increased thresholds (all figures in PLN): Taxable baseTax overup to percent less 572, ,41 plus 30 percent on excess over ,65 plus 40 percent on excess over

31 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. DEDUCTIBLE COSTS OF EARNING INCOME Applicable to, among others, employees: standard costs of PLN 108,50 per month (PLN 1302 per annum) up to PLN 1953,23 per annum for individuals working for more than one employer increased costs of PLN 135,63 for commuters from another town (PLN 1627,56 per annum) up to PLN 2441,54 for commuters working for more than one employer further changes for 2008

32 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. DEDUCTIONS Other costs: 20 percent for civil law contract income (e.g. personal service contracts) 50 percent for income from the transfer of copyrights Health insurance contributions deductible at a rate of 7,75 percent of the base for their calculation (total payable is 9 percent)

33 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. BUSINESS ACTIVITY

34 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. BUSINESS ACTIVITY New definition – income NOT qualified as being from business activity if three conditions are met jointly: service recipient bears responsibility, services performed under the supervision and at a location and time determined by the service recipient, the service provider does not bear economic risk associated with the activities performed.

35 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. BUSINESS ACTIVITY Changes: Passenger car – clearly defined ‘Small taxpayer’ – income limit for 2006 is PLN ! No more monthly tax declarations Quarterly settlements

36 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. KPMG International Executive Services Andrzej Marczak Partner Jan Jodłowski Senior Manager Mateusz Kobyliński Senior Manager

37 © 2006 KPMG Tax Sp. z o.o., the Polish member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. EXPATRIATE SESSION Questions?