Remote working abroad and taxation

 Tax residence and remote working abroad

An important aspect of remote working abroad and taxation is determining the employee’s tax residence. Pursuant to Section 3 of the Personal Income Tax Act, a Polish tax resident is a person who has the centre of their personal or economic interests (the so-called ‘centre of vital interests’) within Polish territory or who stays in Poland for more than 183 days in a tax year. If even one of these conditions is met, the taxpayer is subject to unlimited tax liability in Poland and is obliged to pay tax on their entire income, regardless of where it is earned.

 In the case of remote working abroad, it is important to note that the place where the work is actually carried out is subject to taxation – it is there that the income earned is potentially taxed. Remote working and international taxation are also governed by double taxation agreements concluded by Poland with other countries. Under these agreements, remuneration for employment is taxed in the country of the employee’s tax residence, unless the work is carried out in another country, where it may be subject to taxation there provided certain criteria are met (e.g. exceeding 183 days’ stay).

 Consequences of a change in tax residence

 A long-term stay abroad may result in a change of tax residence. Where an employee moves to another country and meets the residence criteria there, they are subject to that country’s tax laws on their total income. It is worth noting that in the case of dual residence, the conflict-of-law rules set out in double taxation agreements apply, which help to resolve the conflict and avoid double taxation.

 Taxation of remote work carried out abroad

 Remote work carried out abroad is taxable in the country where it is actually performed. For Polish tax residents who carry out remote work outside Poland, this income is taxable in Poland, provided they do not change their tax residence. In practice, this means that even if an employee is physically based abroad, the income tax on remote work carried out abroad must be settled in Poland.

 Where remote work is carried out for a foreign employer and the employee remains a resident of Poland, the obligation to settle the tax on remote work abroad rests with the employee. A foreign employer is generally not a tax withholder in Poland, which means that the employee must pay income tax advances themselves (by the 20th day of the month following the month in which the income was earned) and submit an annual PIT-36 tax return.

Remote work abroad and social security obligations and ZUS contributions

 In addition to tax issues, social security regulations are also important. In principle, an employee who remains a Polish tax resident and works remotely abroad is subject to the Polish social security system and should be registered with ZUS.

 In the case of remote working in European Union Member States, Regulation (EC) No 883/2004 of the European Parliament and of the Council, which coordinates social security systems, applies. Under this Regulation, an employee is subject to social security in the country where they carry out a substantial part of their work, and if they work in several countries, in the country where they are resident, provided that remote work in their country of residence does not exceed 50 per cent of their total working time.

 Framework Agreement on cross-border telework from 2023

 From 1 July 2023, the Framework Agreement on the application of Article 16(1) of Regulation (EC) No 883/2004 in cases of cross-border teleworking will come into force. It allows the worker to remain covered by the social security system of the employer’s country if remote work in their country of residence accounts for at least 25 per cent, but less than 50 per cent, of their total working time.

 This is subject to submitting an application to ZUS and obtaining an A1 certificate, which confirms membership of the Polish social security system. Failure to obtain such a document may result in penalties being imposed on both the employee and the employer.

 The risk of establishing a permanent establishment abroad and its tax implications

 Remote working abroad may give rise to the risk of the employer establishing a so-called permanent establishment (PE) abroad, which results in the need to tax part of the company’s income in the country from which the work is carried out. Under Article 5 of the OECD Model Convention, a permanent establishment is a fixed place of business through which an enterprise carries on business, e.g. an office, a head office, or even an employee’s place of work, provided it meets certain conditions.

 Tax authorities in Poland and case law indicate that even remote working carried out at an employee’s home abroad, using company equipment, may be regarded as a permanent establishment of the company if it constitutes a business activity. This, in turn, may result in the need to file tax returns in both countries, maintain separate accounts and fulfil additional administrative obligations.

 However, in a judgement by the Provincial Administrative Court in Wrocław dated 10 October 2023, it was emphasised that the mere act of working remotely from a home or hotel room, using a laptop and a telephone, does not constitute a foreign permanent establishment. Each case requires individual analysis.

Tax settlement practices for remote working abroad

 Employees working remotely abroad should pay particular attention to their obligation to file their own tax returns in Poland if they are Polish tax residents. The obligation to make monthly income tax advance payments and to submit an annual tax return (PIT-36 form) remains unchanged, even if the salary is paid by a foreign employer.

 In the case of remote work carried out within Poland for a foreign employer, the employee’s tax obligations are the same; however, the employer does not, as a rule, make tax advance payments, which means the employee must settle their tax liability themselves.

 It is worth noting that remuneration received in a foreign currency must be converted into zlotys at the National Bank of Poland’s (NBP) average exchange rate on the last working day preceding the date on which the income was received.

 The importance of double taxation agreements

 International agreements are relevant in the case of remote work abroad, particularly where taxation applies in more than one country. In such situations, methods for avoiding double taxation are applied, such as the exemption with progression method or the proportional credit method, which allow the double tax burden to be avoided whilst ensuring that income is correctly accounted for.

Remote working abroad requires a thorough analysis of tax and social security regulations, both on the part of the employee and the employer. Correctly determining tax residence, understanding the provisions of double taxation agreements and complying with the new Social Insurance Institution (ZUS) regulations on cross-border remote working enable income and contributions to be settled in an optimal and lawful manner. The growing popularity of remote working across different jurisdictions means that both parties need to work with experts who can assist in interpreting and applying complex international regulations.

Frequently asked questions

Is it possible to work remotely from abroad for a Polish employer?

Yes, it is possible to work remotely from abroad for a Polish employer, provided this is agreed with the employer. The Labour Code does not restrict the location of remote work to Polish territory; however, one must bear in mind the tax and social security implications arising from the place where the work is performed.

How do you determine the place of taxation when working remotely from abroad?

The place of taxation depends primarily on the actual place where the work is carried out and the employee’s tax residence status. A Polish tax resident is liable for tax in Poland on their total income, even if they are physically working abroad. If the period of stay in another country exceeds 183 days, a tax liability may also arise in that country, which requires an analysis of double taxation agreements.

Does remote working abroad affect social security contributions?

An employee working remotely abroad for a Polish employer is subject to the Polish social security system, provided they remain a Polish resident and are employed under an employment contract. From 1 July 2023, an agreement on cross-border telework has been in force, which allows employees to remain within the Polish social security system provided that remote work abroad does not exceed 50 per cent of their total working time and certain formal conditions are met (US-36 application and A1 certificate).

What are the risks for a company if a remote worker abroad establishes a foreign establishment?

If an employee working remotely abroad uses a location that can be regarded as a permanent establishment of the company (e.g. a flat, an office), this may result in the creation of a permanent establishment. Consequently, the company may be required to file tax returns in that country, maintain accounts there and incur additional costs and administrative obligations.

What are the tax obligations of an employee working from Poland for a foreign employer?

An employee who is a Polish tax resident and carries out work from Poland for a foreign employer is liable for tax in Poland on their total income. If the employer does not have a branch in Poland, the employee must pay income tax instalments directly to the tax office and submit an annual tax return (PIT-36). Remuneration in a foreign currency is converted into zlotys at the National Bank of Poland (NBP) exchange rate on the day preceding the receipt of the income.

How can you avoid double taxation when working remotely abroad?

To avoid double taxation, you should check whether Poland has concluded a double taxation agreement with the country in question. Under these agreements, income from employment is usually taxed in the employee’s country of tax residence, unless the work is actually carried out in the other country and certain conditions are met (e.g. a stay of more than 183 days). In such cases, methods for avoiding double taxation, such as the exemption with progression or the proportional deduction, are applied.