The MLI Convention and the taxation of pensions from abroad in Poland

The MLI Convention changed the method of avoiding double taxation in some of the agreements concluded by Poland on the avoidance of double taxation (abbreviation: DTT). The exemption with progression method has been replaced by the credit method.

Consequences of the MLI Convention for pensions from abroad

How does the adoption of the new method affect the tax obligations of people receiving foreign pensions and what are the obligations of the bank as a payer in such a situation?

It should be noted that in order to avoid double taxation, most agreements concluded by Poland adopted the principle of applying the exemption with progression method. This means that if a given benefit is taxed in the other state (i.e. the given treaty allows for taxation of the benefit in the source state), then the amount of this benefit is tax exempt in Poland.

However, the notification of the application of the MLI Convention by Poland changed the provisions of selected agreements on the avoidance of double taxation to the disadvantage of Polish tax residents. The Convention replaced those provisions which, for the purpose of avoiding double taxation, impose the obligation to exempt the income of a person residing in Poland from tax, by the provisions, which include the principle of taxing such income in Poland, with the possibility of deducting the tax paid abroad on such income.

This means that in the case of retirement benefits from countries that have ratified the MLI Convention and to which the method of avoiding double taxation adopted by Poland applies, the bank (as a payer) that pays the retirement pension is, in principle, obliged to collect income tax on payments made.

It is worth bearing in mind that in the case of payment of retirement and disability benefits from abroad, the bank, as the payer, is required to apply the provisions of double taxation avoidance agreements. The application of the appropriate contract should take place at the stage of calculating the due advance on income tax. At the same time, the method of avoiding double taxation provided for in a given agreement should be applied only when, according to the provisions of this agreement, the pension is taxable both in Poland and in the country, which pays the pension. In such a situation – in connection with the choice of the method of avoiding double taxation made by Poland – the advance tax paid in Poland should be reduced by the payer, in an appropriate proportion, by the amount of tax paid abroad. In the absence of reliable information on the amount of tax withheld abroad, the bank should collect the full income tax advance.

If, on the other hand, the old-age or disability pension is taxable only in the country of its origin in accordance with the double taxation treaty, the bank is not obliged to collect advance payments on such income.

Taking into account the content of the DTT may also mean that taxation of foreign retirement and disability pensions paid by the bank will take place only in Poland. This situation takes place under the agreements on avoidance of double taxation concluded with Austria and Slovenia, for which the application of the MLI Convention has already started on January 1, 2019. Indication of the provisions of the agreements on the avoidance of double taxation, along with the numbers of articles and paragraphs that have changed in in connection with the ratification of the MLI Convention, took place in the government declaration of June 6, 2018 on the binding force of the multilateral Convention implementing tax treaty measures aimed at preventing the erosion of the tax base and profit shifting, prepared in Paris on November 24, 2016.

Since when the method of avoiding double taxation is changed by the MLI Convention?

The table below presents the DTT with countries where the method of avoiding double taxation has already been changed by the MLI Convention or will be changed in the near future:

income earned from

January 1, 2019

income earned from

January 1, 2020

income earned from

January 1, 2021

Austria

Slovenia

Great Britain

Ireland

Finland

Israel

Japan

Lithuania

New Zealand

Slovakia

Norway

Canada

Denmark

The above-mentioned list of countries may be extended – as more countries ratify the MLI Convention. The credit method is already in force in some Polish DTTs, e.g. in the DTT with the Netherlands and Belgium, in the case of which the amendment to the DTT introduced the possibility of taxation of pensions at source from 2019, and thus, from 2019, Polish residents in Poland pay the difference in taxation, between the Belgian 10% withholding rate and the rate applicable in Poland (17% up to PLN 85,528 thousand or 32% after exceeding the threshold of revenues of PLN 85,528 thousand).