Posting workers from the EU to Poland – a guide for enterprises (Part 2)

The starting point for determining the tax consequences of posting an employee is the so-called tax residence of the employee, which is his/her place of residence used for the taxation of income. It should be established whether the employee's tax residence changes as a result of the posting (for example, from Germany to Poland).

The Polish Personal Income Tax Act defines residents as individuals who meet at least one of the following conditions:

For instance, the tax treaty between Poland and Germany reads that a person: 

“shall be deemed to be a resident only of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interest)”.

Usually, the above-mentioned criteria help to unequivocally resolve the residence conflict. Otherwise, further criteria provided for in tax treaties should be consulted, i.e. the criterion of habitual abode and the criterion of nationality. 

In the vast majority of cases, the fact of posting will not change the employee's tax residence. It may change, however, if the employee is posted on a long-term basis and moves to another country together with his/her closest family.

If the employee’s residence changes to Poland, the posted employee will have unlimited tax liability in Poland, which means that his/her income will generally be taxed in Poland (except in cases stipulated in tax treaties).

Importantly, a change of residence has only an effect for the future. This means that the change does not affect past accounting periods.

An employee is posted to Poland in February. At the beginning of his trip, he did not plan to settle in Poland for good – he lived in a flat rented for him by his employer, and the employee’s family lived in their country of origin. Over time, the employee changed his plans: in July he rented a flat himself for indefinite time and had his family move to Poland for good.

In this case, tax residence can change. If this happens, the employee’s tax year will be divided into two periods: one before the change of residence and one after the change. Income earned before the change of residence will be taxed based on rules applicable to non-residents, and income earned after the change – based on rules applicable to residents.

What about employees whose residence does not change? Here you should also consult the tax treaty – more specifically the article that regulates the place of taxation of income derived from dependent personal services (it is usually Article 15). According to a standard tax treaty, income from employment is taxed in the state in which the employment is exercised (i.e. in the host country). Exceptionally, employment may be taxed in the state of the employee's residence if all of the following three conditions are met jointly:

In older tax treaties, the first condition was worded in more simply, allowing taxing income in the place of residence if the employee stayed in the host country not longer than 183 days in the calendar year. This wording, however, was often misused – employers could post employees at the turn of the year, for example, two times, each time for 100 days. The new wording eliminated this loophole and requires employers to track the exact number of days the employee is posted for.

The ‘employer in economic terms’ condition only seems simple but in fact it is not. According to case law and specialist literature, this condition says that the employer from the employee’s country of residence must in fact direct the employee's work, use the results of the employee’s work, take responsibility for the employee and bear the economic cost of the employee's remuneration. Therefore, the following aspects should always be checked:

If these rights and obligations pass onto the enterprise in the host country (in the above-mentioned example: Poland), this may lead to a situation where the condition is not met and the salary for the work during posting will be taxed in Poland.

The third of the above-mentioned conditions refers to permanent establishments, i.e. fixed places of business through which foreign enterprises carry on business in Poland (e.g. an office, a manufacturing plant or a warehouse, but also long-term construction or assembly projects). A permanent establishment is often triggered when an enterprise opens a branch office in Poland, but this is not an absolute condition. According to a standard tax treaty, a permanent establishment should be allocated costs that it would incur if it operated as an independent enterprise. If these costs include the employee’s remuneration, then it will be taxed in the host country.

The crucial issue for employers is personal income tax advances to be deducted from the employee’s income every month. In a typical situation (i.e. a domestic enterprise hires local employees), it is the employer as a work establishment that is obliged to pay the PIT advances for its employees (Article 32(1) of the PIT Act).  But this issue looks different for foreign enterprises and posted employees.

The most important thing is to check whether the employee's income will be taxed in Poland based on the guidelines presented in the previous section. Only if income is taxed in Poland should the issue of tax advances be considered at all.

In the next step, it should be checked whether the employer will be considered a work establishment and PIT withholder as per Article 32(1) of the PIT Act. This is often the case when the employer has a permanent establishment or a branch office in Poland.

The answers to the above questions are crucial to determining the applicable legislation and the obligations of the posting employer.

The regulations of the legal acts often allow the employee to remain covered by his/her previous social security system if specific requirements are met. In practice, this means that no social and health insurance contributions will have to be paid in Poland with respect to the remuneration of, for example, a German employee posted to Poland but the contributions will be payable in Germany. This is a huge facilitation for employers that do not carry on business in Poland on a daily basis.

The A1 certificate is a document that confirms that an employee is covered by a social security system of a given state in the European Union. The certificates are issued by local social insurance institutions (in Poland it is ZUS). 

An employer who posts employees to Poland has therefore the following obligations:

The laws allow transferring the obligations of the social insurance contribution payer from the employer to the employee based on a special agreement.

Posting employees to Poland requires thorough preparation and meeting many formal requirements in Poland. Failure to meet any of them may have negative consequences for the employer,  ranging from a labour dispute with the employee to  financial penalties. 

Contact us – we will be happy to answer all your questions about posting of employees and will guide you through the entire process. We offer legal and tax consulting​ with tailor-made solutions taking into account not only legal but also tax aspects of posting and consequences in the area of social security. We also offer assistance in the host country.