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Wednesday, 27 December 2006

The Polish President has ratified a Convention for the avoidance of double taxation

On 27 December 2006, the President of the Republic of Poland, Lech Kaczyński, ratified the Convention between the Republic of Poland and the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital gains, signed in London on 20 July 2006.

The newly ratified agreement is to supersede the existing 1976 agreement concluded at a time when the political and economic situation in Poland was completely different.

Following the opening of the UK labour market, the number of Polish nationals emigrating to Britain has been steadily growing. The currently applicable double taxation avoidance methods under the existing agreement present a major difficulty for Poles working in the UK. Their earnings are taxable both in the UK and in Poland; consequently, the situation of these Polish employees compares unfavourably to that of the Poles who have taken up employment in other countries, e.g. in neighbouring Ireland. Given the lower tax burden in Britain, Polish employees, after paying their taxes in the United Kingdom, have to pay the difference in Poland. This has provoked many protests among Polish employees in the UK, and a number of interventions and parliamentary questions on the issue have been addressed to Polish MPs and senators.

The new agreement introduces the method of exemption with progression as the tax calculation method. Under the new method, the state in which the taxpayer has his/her tax residence exempts from taxation that part of his/her income which may be taxable in the source country pursuant to the agreement. A vast majority of the double taxation avoidance agreements signed by Poland provide for the exclusion with progression method as the double taxation avoidance method (including the agreement with Ireland).

Consequently, the Convention provides for much more favourable taxation rules for individuals employed in Britain and Northern Ireland as compared to the existing agreement.
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