The set of parties who can benefit from inheritance and gift tax exemptions will expand. The exemption will now apply to persons who are or have been in a foster family, a family-style children’s home, a care and educational institution, or a regional care and therapeutic institution, as well as persons forming a foster family, running a family-style children’s home, or working with children in a care and educational institution or a regional care and therapeutic institution.
Inheritance and gifts
In Poland, taxation of inheritance and gifts depends on the relationship between the recipient and the donor or between the heir and the decedent. Depending on this relationship, the taxpayer is classed in tax group I, II or III, which translates into a tax rate that varies from 3% to 20%. The tax is calculated on the excess of the tax base over the tax-free amount.
At the same time, immediate family, i.e. spouse, descendants, ascendants, stepchildren, siblings, stepfather and stepmother, can take advantage of an exemption from inheritance and gift tax on the acquired benefit (within the “zero” tax group) if they report the acquisition of property to the head of the relevant tax office within 6 months from the date on which the tax obligation arose, and in the case of acquisition by inheritance within 6 months from the date when the court’s decision confirming the inheritance became final.
This exemption is not limited in amount, which means that if the individual condition (i.e. family relationship with the donor or decedent) and formal conditions are met, the taxpayer may, as a rule, receive an unlimited benefit which will be tax-free.
Additional requirements (apart from the notification obligation) for the tax exemption apply to monetary gifts, with proof of transfer to the recipient’s payment account, or a non-payment account at a bank or savings and credit union, or by postal order. At the same time, the taxpayer is exempt from the obligation to report gifts or inheritance from one person with value not exceeding PLN 9,637 within 5 years preceding the year when the last acquisition took place. It should be added that income subject to inheritance and gift tax is not subject to personal income tax.
If the taxpayer fails to make the required notification, the gift or inheritance within the immediate family is deemed to have been made within tax group I, which means taxation at a rate of between 3% and 7%, depending on the value of the benefit.
Extending the set of people entitled to exemption
The statutory definition of descendants will be extended to include people who are or have been in a foster family, a family-style children’s home, a care and educational institution, or a regional care and therapeutic institution.
The definition of ascendants has also been extended to include persons forming a foster family, running a family-style children’s home, or working with children in a care and educational institution or a regional care and therapeutic institution.
For example, this means that for purposes of applying the tax exemption, a gift made between a person who stayed in a family-style children’s home and a person running the home will be equated to a gift made between parent and child.
Until now, such persons have been included in tax group III, i.e. as “strangers” and thus subject to a high tax, without the possibility to claim a tax exemption other than for the initial tax-free amount.
The amendment will enter into force on 27 October 2020 and apply to acquisitions of property occurring after that date.
Despite the clear purpose of these regulations, which were supposed to enable the movement of capital within the immediate family without being depleted by public charges, a taxpayer applying exemptions from inheritance and gift tax should be careful when making gifts.
The tax authorities take a rigorous approach to the formal documentation requirement for monetary gifts. In their view, in practice this means that only a direct transfer from the donor’s account to the recipient’s account can meet this requirement. Any other form of making a gift (e.g. direct deposit of money by the donor into the recipient’s account, or a transfer of cash to be paid into the bank by the beneficiary himself) poses a risk of challenge to the taxpayer’s right to benefit from the tax exemption. Sometimes the province administrative courts side with taxpayers, departing from a literal reading of the law to protect the property interests of immediate family members.
Joanna Goryca, Tax practice, Wardyński & Partners