Critical Comments on Bill to Liquidate Abolition Allowance -
Critical Comments on Bill to Liquidate Abolition Allowance
Date of publication: 23.09.2020

On 16 September 2020, a Bill was proposed to amend the Act on Personal Income Tax, the Act on Corporate Income Tax, the Act on Fixed Income Tax from Certain Personal Revenues and certain other acts, including, among other, the ‘limitation’ of the abolition allowance and the apparent/illusory extension of the group of taxpayers who may use a PIT exemption for seafarers.

The bill is available at:

In this article I will present a critical opinion on the above-mentioned Bill, whose justification is, to my mind, at least internally contradictory. Moreover, it does not reflect the practicalities of the legal turnover in Poland. The form of the drafted regulations with respect to the liquidation of the abolition allowance is aimed at introducing a regulation into the Polish tax law that will violate fundamental principles that stem, among other, from the European Charter for Human Rights and Fundamental Freedoms and the TEU.

The above-mentioned proposed amendments, contrary to the position expressed by the Ministry of Finance, are to be interpreted as an extreme display of the pro-fiscal policy of the State Treasury.

‘Limitation’ or the factual liquidation of the abolition allowance

Before the appearance of the above-mentioned draft amendments to law, Vice-Minister Sarnowski indicated in an interview of 13 September 2020 that the abolition allowance would not be liquidated, but only ‘limited’:,jan-sarnowski-ulga-abolicyjna-cel-fiskalny.html

The above-mentioned claim, after one becomes acquainted with the actual content of the bill, has to be considered as incoherent and potentially misleading for taxpayers, because according to the Bill:

Art.1(12) ‘in art. 27g(2) the following second sentence shall be added:
‘The allowance, however, shall not exceed the value of an amount that reduces the tax mentioned in art. 27(1a)(1)’;’

The above-mentioned provision means in fact that the allowance is limited to a tax-free amount; as a consequence, a taxpayer will use an ‘allowance’ that results from regulations on a tax-free amount; therefore, nothing will be changed by this provision to the benefit of a taxpayer.

The justification of the Bill, p. 33, reads as follows: ‘According to this regulation, for a tax base in excess of PLN 8,000.00, an amount that reduces a tax amounts to PLN 1,360.00. Therefore, all taxpayers will be able to continue the use of an abolition allowance; however, an amount deducted from income tax thereunder will not exceed PLN 1,360.00. In this way, the present purpose of an abolition allowance will be maintained, aimed at reducing tax burdens for a group of taxpayers who need this most, with the simultaneous elimination of abuses that occur in using an abolition allowance by taxpayers who generate high income abroad.’

Conclusion: According to the above-mentioned regulation, an abolition allowance will be actually liquidated in the PIT Act. The analysis of the justification of the above-mentioned Bill may lead to the far-reaching conclusion that according to the Ministry of Finance it is an ‘abuse’ for taxpayers to generate high income abroad and to use an allowance they are entitled to under law. Such an approach should be treated as a manifestation of discrimination against a specific group of taxpayers, not because of a method of avoiding double taxation, but because such taxpayers earn ‘high income abroad’.

With respect to the above-mentioned scope of the justification it would be reasonable to lodge an official enquiry to the Ministry of Finance, to find out what is understood as the above-mentioned alleged ‘abuse’.

Causes of liquidating an abolition allowance

First of all, it has to be pointed out that the justification presented by the Ministry of Finance for the liquidation of an abolition allowance is internally contradictory and illogical at the same time.

It is worth noting that page 18 of the justification reads as follows: ‘The purpose of the designed actions, which are to tighten up the personal income tax area, is to limit the application of an abolition allowance mentioned in art. 27g of the PIT Act. The aim of the abolition allowance is to abolish the effect of the method of the proportional deduction for selected sources of revenue and to equalise their effective taxation with the effect resulting from the method of exclusion with progression.

Comment by MR: From its very beginning, the purpose of an abolition allowance has been to equalize the status of both groups of taxpayers working abroad, i.e. those who are covered by the above-mentioned method of proportional deduction and those who are covered by the method of exclusion with progression. The original formulation of the regulations clearly discriminated against the group subject to the method of proportional deduction; therefore, in order to prevent the discrimination against one group, the so-called abolition allowance was introduced.

The argument of ‘tightening up within PIT’ is plainly fallacious, because art. 27g of the PIT Act is applied according to its purpose and normative wording. Instituting a policy of tightening up the tax system in this meaning may lead in the future to removing any and all allowances and exemptions available to taxpayers.

Considering the above, one may get an impression that the Ministry of Finance understands as ‘tightening up’ the introduction of the pro-fiscal policy of the State towards Polish residents working abroad, whose income is covered by a less favourable method of proportional deduction. The justification reads on as follows:

‘Since the introduction of the abolition allowance into the Polish tax system, the conditions that were the basis for its application have changed significantly. First of all, the awareness of tax consequences of generating income in another state among taxpayers generating income abroad has increased. Secondly, negative consequences have been noted due to the use of the allowance for aggressive tax policies, using the provisions of double taxation treaties. Therefore, it has become necessary to change the rules that govern an abolition allowance, so that it is applicable only to those taxpayers who earn the lowest income, hence need the State support most in reducing tax burdens.’

Comment by MR: The above arguments are internally contradictory and in fact bizarre. No circumstances that justified the introduction of an abolition allowance into the Polish legal system have changed, except for the introduction of amendments to numerous double taxation treaties concerning a method of avoiding double taxation with a method of exclusion with progression changed to a method of proportional crediting, which is less favourable for taxpayers; when those changes were introduced, it was pointed out that taxpayers had no reasons to be concerned, because they might use an abolition allowance (e.g. the United Kingdom, New Zealand, and Ireland).

Conclusion: When reading the above justification, the following question has to be addressed: Since when and why the higher awareness of taxpayers who generate income abroad should be the basis for introducing unfavourable legal-tax regulations for them, which will have a clearly discriminatory nature? It needs to be indicated here that due to the growing awareness of taxpayers, the Ministry of Finance has to take into consideration the increased tax emigration after the implementation and as a consequences of the above-mentioned changes.
According to my observations and feed-back received from taxpayers, the introduction of such unfavourable changes to the tax system has contributed to the growing negative sentiments among numerous professional communities, including seafarers, which will eventually lead to the situation where a large group of highly qualified workers will emigrate from Poland permanently.

Change of tax law leading to so-called ‘brain drain’

According to information presented in page 32 of the above-mentioned justification, the Ministry of Finance indicates that: ‘An abolition allowance is an incentive to undertake an economic activity outside the territory of the Republic of Poland, which is often a first stage in the process of a permanent relocation of one’s domicile abroad. (…). The above-mentioned effects are further deepened by the fact that a large percentage of emigrants are highly qualified individuals, whose presence in the country would contribute above average to the dynamic economic development of our state (so-called bran drain)’.

Comment and conclusion of MR: First of all, it is necessary to refer to the issue that the introduction of such sudden (the first notice of the proposed amendments appeared in September 2020 and the 6 day-day period for consulting the drafted changes was imposed) and far-reaching tax changes that affect adversely the financial situation of a large number of highly qualified professional groups (seafarers, pilots, shipyard workers, etc.), which are at the same time influenced by the Covid-19 pandemics crisis and have not received any government support, will lead directly to the ‘brain drain’ described in the Bill, i.e. the outflow of best qualified workers from Poland.

What is more, the above-mentioned phenomenon should be an argument for no limitations and no liquidation of an abolition allowance in the future. Most importantly, this argument should lead to the establishment in Poland of the most transparent, safe and friendly tax system for Polish residents who work abroad as well as for all taxpayers. However, the shape of the drafted regulations indicates that the intentions of the legislator are different.

Finally, the above-mentioned arguments, in my opinion, threaten the basic freedom enjoyed in the European Union, i.e. the free movement of people, including workers.

‘Privileged position’ of those who work abroad, because taxpayers in Poland pay taxes

According to information included in page 31 of the justification: ‘In this context, one cannot recognise any systemic reasons for the application of an abolition allowance to all income generated abroad by personal income taxpayers.

It is important to note the unreasonably privileged situation of persons who earn high income abroad vs. persons who earn income in the territory of the Republic of Poland.’

Comment of MR: When reading the above-mentioned arguments one may get an impression that the Ministry of Finance has somehow made an attempt at discouraging employees in Poland, including Polish residents, who according to law take advantage of an abolition allowance due to their foreign income. Persons who work abroad are in a different situation, both socially and fiscally, from persons who perform work in Poland, including but not limited to due to the rotation system of work and the separation from families. The above arguments may show the complete lack of understanding of the nature and burdens that result from working abroad.

Persons who work abroad incur numerous additional and major costs, which are unknown to employees who work in the territory of the Republic of Poland. What is more, such persons stay out of home for many months during a fiscal year, which results in a separation from their families.
For example, Polish seafarers (a professional group that is classified as one of three most hazardous jobs) have to cover the following costs: training, language courses, certification, insurance, etc., which in many instances are not reimbursed to them. If the Polish legislator, in the name of the principle of equality and non-discrimination, would like to improve the Polish tax system, he should make it possible to deduct the above-mentioned costs from income, so as to reduce a tax base for persons who work abroad.

A situation of the double lack of taxation, because of an abolition allowance?

According to an opinion presented by Vice-Minister Sarnowski with respect to the abolition allowance in Gazeta Prawna on 13 September 2020 (link above): ‘This often leads to the situation of the double lack of taxation, when a tax is not paid either at a place of generating income or at a place of residence, i.e. Poland.’
This argument is put forward also in the justification, among other in page 28, with reference to the generality of taxation.

Unfortunately, in this case we face the incoherence and a somewhat distortion of the sense of regulation. If the proportional credit method is applied in correlation with an abolition allowance, there is no question of the double lack of taxation, because the purpose of all double taxation treaties is to avoid double taxation of income, but not to avoid taxation at all.

Therefore, if a tax obligation of a Polish resident employed on-board a ship of a British ship-owner is transferred according to a double taxation treaty to the United Kingdom, such income is taxed in the United Kingdom, which does not always mean that a tax is paid in the above-mentioned state (a tax liability).

It is necessary to highlight here the glaring inconsistency in the actions of the legislator, namely the lack of differentiation between two essential concepts of tax law, i.e. ‘tax obligation’ and ‘tax liability’, which are two completely different institutions in tax law.

One could speak about the situation of the lack of double taxation if a Polish resident earned income in a ‘tax haven’, and such income were not covered by a tax system, which is not the case, because according to the principle of an unlimited tax obligation, income from ‘tax havens’ is taxed in Poland (no possibility of claiming an abolition allowance).

Vice-Minister Sarnowski, in the above-mentioned interview given on 13 September 2020, claims that ‘As long as an abolition allowance applies, provisions of such agreements will not actually start to be effective and Poland will not fulfil its obligations that stem from the cooperation within OECD. The limitation of an abolition allowance is a necessary step in this direction’.

With reference to the above opinion, it has to be pointed out that Poland fulfils obligations that result from the cooperation with OECD in this scope, including but not limited to by modifying provisions of double taxation treaties and creating a list of so-called tax havens in correlation with EU regulations, while the above-mentioned statement cannot be confirmed either in conventions, to which Poland is a party, or in a model OECD convention. Provisions of these agreements ‘actually work’ and Polish residents fulfil all obligations that result from tax statutes; however, according to the pro-fiscal state policy, it is assumed that Polish residents working abroad are supposed to pay a tax in Poland.

Tax evaders use an abolition allowance?

In the interview of 13 September 2020 (link above), Vice-Minister Sarnowski claims: ‘Hence, there are situations where Polish residents do not pay any taxes on income earned abroad or pay a minimum tax. This is not, however, a question that applies only to employees, but first of all to businesses, which implement complicated international tax optimizations.’

The above statement may mislead taxpayers, while the justification of the Bill itself refers exclusively to the argument of ‘tightening up the PIT system’.

The group that is primarily entitled to an abolition allowance are employees, who use this regulation in order to equalise their tax situation to that of employees who are covered by a favourable method of exclusion with progression. Assuming the presented assumptions, using allowances and deductions by a taxpayer, for example deducting foreign per diems, will be interpreted as ‘tax optimization’.

What is more, there is already a clause in the Polish system that makes it possible to fight against tax optimization among entrepreneurs; therefore, the above-mentioned argument in the justification of the analysed amendments is completely specious, and should not refer to individuals, but only to enterprises. To limit abuse in the above-mentioned scope, the following regulation has been introduced in Poland:

According to art. 119a(1) of the Tax Ordinance, avoiding taxation is an action (or a series of different actions among different entities) taken primarily to obtain a tax benefit, contrary to an object and purpose of a statutory regulation in the given circumstances.

What will happen to an abolition allowance for 2020?

Considering such sudden actions taken by the legislator, if the abolition allowance is liquidated already from 1 January 2021, a question has to be asked about what will happen to the settlement of the allowance for 2020? Will taxpayers be able to count on this settlement in the expected shape? No answer is given in the drafted amendment, and considering the formulated justification and direction of drafted changes, this should be explicitly expressed in the Act. Otherwise, it may be the case that there will be no necessary columns for accounting for an abolition allowance for 2020 in PIT returns starting from 1 January 2021.

Is there anything positive for seafarers in the planned changes to the PIT Act?

Apparently yes, because the PIT exemption of seafarers is planned to be extended to all flags, not only the EU or EEA states. In fact, this regulation does not give much to seafarers and is of an apparent nature. The intention of this change is most probably to pacify feelings among the public.

One needs to keep in mind that the legislator has kept in the PIT Act in the above-mentioned scope very narrowing definitions that are identified incorrectly by tax authorities with international transport and the detailed conditions concerning ‘183 days’. What is more, it is still not clear what a certificate should look like that will finally determine if a seafarer is entitled to an exemption or not.

Unfortunately, the amendment proposed in the drafted regulations is of mere cosmetic importance for seafarers.

What is the aim of all this?

The justification ascertains that relatively low tax revenues will flow to the State Treasury after the ‘limitation’ of an abolition allowance, based on rather vague calculations. Therefore, it is reasonable to ask the following question: Why is the Ministry of Finance pushing the liquidation of an abolition allowance so much, if this change has no substantial importance for the budget revenues?


The drafted amendments actually remove from the Polish legal system an abolition allowance in its present form, making it an illusory construct. On the other hand, the modification of the regulation concerning the PIT exemption of seafarers by extending its application to all flags in practice will not extend radically the group of taxpayers who will be entitled to this exemption.

This limitation results from the necessity to fulfil very restrictive conditions for qualifying for the above-mentioned exemption by seafarers, which have to be fulfilled jointly. Therefore, the analysed Bill has to be assessed critically.

For the above-mentioned reasons, we encourage all parties concerned to use the above arguments to block the drafted negative changes for taxpayers.

Legal Counsel Mateusz Romowicz