The problem of double taxation of inheritances and gifts

Recently, the issue of taxation on foreign inheritances and gifts has been the subject of, for example, a parliamentary question (dated 16 December 2021, No. 29417), a citizens’ petition (dated 6 December 2021) and a statement by the Ombudsman (dated 27 March 2023). These documents raised the issue of multiple taxation of assets due to the lack of relief in domestic legislation, as well as the failure to include inheritances and gifts in double taxation agreements.

Where does the problem lie? Clearly, in the provisions of the current Act of 28 July 1983 on Inheritance and Gift Tax. Article 2 stipulates that the acquisition of ownership of property located abroad or of property rights exercised abroad is subject to tax if, at the time of the opening of the succession or the conclusion of the gift agreement, the acquirer was a Polish citizen or had their permanent residence within the territory of the Republic of Poland. Most often, the problem lies in the heir’s or donee’s connection to Polish citizenship.

In official responses to the aforementioned submissions to the authorities, essentially the same arguments are put forward, namely:

• a lack of willingness and initiative on the part of other states to conclude, or possibly amend, double taxation agreements and extend them to cover inheritance and gifts;
• a lack of harmonisation within the EU – whilst the Commission has issued recommendations and indicated that Member States should consider introducing such preferences, the Ministry of Finance’s response suggests that these are not binding; furthermore, no action is intended in this regard, partly because other Member States lack the initiative and willingness to introduce similar measures;
• an exemption mechanism is in place, which applies to every taxpayer subject to the provisions of the Act.

It should be noted that if Poland were to take such action regarding points 1 and 2, it would place us at the forefront of changes in international law as those reaching out to taxpayers who, in many cases, are already in fact only loosely connected to the country. However, the argument is raised that the introduction of preferential treatment for taxpayers would be detrimental to local government bodies. On the other hand, however, for example in response to a petition (letter from the Minister of Finance dated 9 February 2022, ref. no.: PS1.056.3.2021), it is pointed out that the problem is marginal, as it concerns only those cases where the exemption already provided for in the Act does not apply. If, therefore, the Minister considers this to be such a small proportion of cases, any compensation for local government would not be so significant that the central budget could not afford it, and as a result, many taxpayers who are unfamiliar with the intricacies of the Act would avoid an unpleasant surprise.

However, point 3 refers to the individual interpretation of 19 September 2023, ref. no.: 0111-KDIB2-3.4015.142.2023.4.BD and similar situations in which Polish citizens, not residing in Poland and often having only minimal ties to the country (and even those ties may now be limited solely to holding Polish citizenship), fall into a veritable trap related to the necessity of reporting the acquisition of an inheritance to the Polish tax authorities. Failure to report within the deadline results in the loss of the right to benefit from the exemption referred to by the Minister of Finance in each of the letters cited above. In practice, it is likely that only a small percentage of Polish emigrants consider whether, in a situation where they have been living for years in another country where their centre of vital interests is located, they still have any obligations towards the Polish tax authorities. In the individual interpretation cited, we are dealing with a clear-cut case of a person who, upon reading the provisions of the Act, has, so to speak, misled themselves because, just as with obligations towards the tax authorities, the average person would not consider whether the Polish Act, when referring to notaries, refers exclusively to notaries in Poland, or notaries in general (including foreign ones). Of course, in accordance with the principle of general knowledge of the law, every citizen should be aware of the content of the applicable provisions. In practice, however, it sometimes turns out, as in the case discussed in the interpretation, that the taxpayer perceives the content of the provisions differently from the tax authorities. In this case, it is clear from the interpretation that the taxpayer assumed that, since they had gone to a notary, they did not consider how an English notary differs from a Polish one or how the rules governing the practice of the profession are regulated, and they interpreted the Polish Act directly to mean that the reporting obligations rest with the notary.

A separate issue raised, for example, in response to a parliamentary question or a petition, is the possible taxation of foreign nationals who have their permanent residence in Poland. Such a person is also subject to the provisions of the Act, and the same taxation rules apply to them.

The issue of taxing foreign gifts and inheritances must therefore be viewed from multiple angles. On the one hand, we recognise that the problem concerns the understanding of the Act’s provisions and the fact that it applies to Polish citizens even if they have virtually no ties to Poland. Another issue is the awareness that the Polish Act concerns the obligations of domestic taxpayers, which, however, does not follow directly from the provision but from a systemic interpretation of the Act. For some, it may not be entirely clear that Polish regulations continue to govern their situation outside the country’s borders, yet in terms of fulfilling formalities, they are limited to those borders and require the fulfilment of obligations specifically within the country.

The fact that this is a very topical issue is evidenced not only by the fact that we can very quickly find numerous interpretations issued on the subject of the taxation of inheritances and gifts, but also by the fact that we can easily find examples such as the individual interpretation of 29 March 2023, ref. no.: 0111-KDIB2-2.4015.13.2023.1.MM, which relates to the application of the exemption provided for in the Convention between the Republic of Poland and the Republic of Austria on the prevention of double taxation of inheritance tax of 24 November 1926 (Journal of Laws of 1928, No. 61, item 557), and thus on the basis of one of only three conventions concluded by Poland that relate to the avoidance of double taxation of inheritances and gifts.

Given that today many Poles have moved abroad for various reasons, and that many of them do not plan to return as they are building their lives in different parts of the world, the issue remains relevant, and may affect these individuals at the most unexpected moment, as there is usually a belief that since one has left, it means one has no obligations in one’s former country. Such reasoning would seem logical, yet in the September interpretation, the Director of the National Tax Information Service (KIS) reminds us that in certain situations, Polish law still remembers us, and not always in a favourable light.

Hence, one must agree with the proposals put forward in the aforementioned parliamentary questions, petitions and the Ombudsman’s statement, calling for amendments to the current regulations. It should be noted that the legislator could regulate the issue by applying a structure similar to that already in place in the provisions of the Act on Tax on Civil Law Transactions, where the general principle is that, in the case of property located abroad or property rights exercised there, the place where the legal transaction takes place is relevant for taxation purposes.

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Author

Piotr Magda

Radca prawny, Senior Associate

The practice includes ongoing advice on administrative and tax law. He has extensive experience in handling judicial, administrative, tax and judicial-administrative proceedings concerning both individual clients and business entities, including that gained through many years of providing services to local government units and other units of the public finance sector.

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