What is exit tax?
Exit tax is a tax on unrealised capital gains that may arise when a taxpayer transfers assets, tax residence or business activity out of a jurisdiction in a way that limits that jurisdiction’s future right to tax the gain. In practical terms, the tax may be due even though the asset has not been sold and no cash proceeds have been received.
The purpose of exit tax is to protect the taxing rights of the state in which value was created before the asset, business or taxpayer leaves that tax jurisdiction. In the European Union, exit taxation of corporate taxpayers is connected with Article 5 of Council Directive (EU) 2016/1164, known as the Anti-Tax Avoidance Directive or ATAD. In Poland, the rules are implemented mainly in the Personal Income Tax Act of 26 July 1991 and the Corporate Income Tax Act of 15 February 1992.
Exit tax is relevant both for individuals and companies. For individuals, it may apply, for example, when a person changes tax residence and Poland loses the right to tax future gains on certain assets. For companies, it may apply when assets are moved from Poland to another country, when a permanent establishment is transferred abroad, or when a company changes tax residence in a way that affects Poland’s taxing rights.
What does exit tax apply to?
Exit tax generally concerns the difference between the market value of an asset at the time of exit and its tax value. The tax is therefore based on an unrealised gain, meaning a gain that exists economically but has not yet been realised through a sale or other taxable disposal.
In Poland, exit tax may apply in particular to:
- the transfer of assets from Poland to another country, if Poland loses the right to tax gains from those assets;
- the transfer of assets between a Polish head office and a foreign permanent establishment, or between permanent establishments, where this causes Poland to lose the right to tax gains from those assets;
- the transfer of tax residence by a company outside Poland;
- the change of tax residence by an individual, where statutory conditions are met;
- certain cross-border reorganisations, restructurings or business transfers, if they involve a transfer of assets or tax residence that limits Poland’s taxing rights.
For Polish personal income tax purposes, exit tax may apply to individuals if the total market value of the relevant assets exceeds PLN 4,000,000. This threshold results from Article 30da of the Polish Personal Income Tax Act. The tax rates for individuals are 19% where the tax value of the asset is determined, and 3% where such tax value is not determined, also under Article 30da of the Personal Income Tax Act. For corporate taxpayers, the exit tax is generally linked with corporate income tax rules on income from unrealised gains, regulated in particular in Articles 24f–24l of the Polish Corporate Income Tax Act.
The rules require careful analysis because exit tax is not triggered by every foreign move, foreign investment or change of residence. The key issue is whether Poland loses, fully or partly, the right to tax the gain that accrued while the asset or taxpayer was within the Polish tax jurisdiction.
When should exit tax be analysed?
Exit tax should be considered before making decisions that affect tax residence, the location of assets or the structure of an international business. This applies especially where assets have increased in value, where intellectual property or shares are involved, or where a business operates through more than one jurisdiction.
Individuals should analyse exit tax before moving their tax residence abroad, especially if they hold shares, securities, investment portfolios, partnership rights, intellectual property rights or other assets with substantial unrealised gains. The issue may also arise in succession planning, relocation of entrepreneurs, family office structures and changes of residence by shareholders of Polish or foreign companies.
Entrepreneurs and companies should review exit tax exposure before transferring assets abroad, moving functions or risks to another group entity, relocating management, closing or transferring a permanent establishment, or implementing a cross-border merger, division or restructuring. Exit tax should also be coordinated with transfer pricing, corporate income tax, accounting and valuation rules.
Why is early legal and tax advice important?
A late analysis of exit tax may lead to unexpected tax liabilities, reporting obligations, disputes with tax authorities or liquidity problems. This is particularly important because the taxable event may arise without a sale of the asset. The taxpayer may therefore be required to account for tax on value that has not generated cash proceeds.
Early consultation can help identify whether exit tax applies, determine the relevant assets, assess their market value and tax value, and verify available procedural options. In certain cases involving transfers within the European Union or the European Economic Area, payment of exit tax may be spread over instalments under conditions provided by Polish tax law, including rules implementing the ATAD framework. The availability and consequences of such deferral should be assessed on the basis of the specific facts and the applicable provisions.
Support of a law firm in exit tax matters
Legal and tax support in exit tax matters may include in particular:
- assessment of whether a planned relocation, transfer or restructuring may trigger exit tax;
- analysis of Polish tax residence for individuals and companies;
- review of assets covered by exit tax rules and identification of potential unrealised gains;
- coordination of legal, tax, accounting and valuation aspects of a transaction;
- support in cross-border reorganisations, mergers, divisions and business transfers;
- preparation of tax risk assessments and documentation for management or shareholders;
- assistance in communication with tax authorities and in tax disputes;
- analysis of available payment deferral or instalment mechanisms where permitted by law.
Need assistance with exit tax? Contact us.
See also
- Corporate tax
- Tax Law
- Transfer pricing
- Business restructuring