Income from U.S. LLC – PIT obligations and tax settlement in Poland

With the growing popularity of international expansion, more and more Polish entrepreneurs are deciding to establish companies outside of the country. Such decisions pose a range of tax-related questions for taxpayers. One of the key issues is whether income earned from the activities of foreign entities is subject to taxation in Poland. What regulations apply to this matter, and which rules should be followed when reporting such income?

Questions regarding tax obligations for individuals earning income from a U.S.-based Limited Liability Company [LLC] were addressed by the Director of the National Tax Information [DKIS] in a tax ruling issued on November 4, 2024. The tax authority confirmed that Polish tax residents are required to report income earned from a U.S. LLC in Poland. Moreover, the method of taxation for such income may differ from the taxation of income from sole proprietorships in Poland.

Factual Background

The taxpayer, a Polish tax resident, earned income from:

1. A sole proprietorship registered in Poland, through which consultancy services were provided.
2. A U.S.-based LLC, a hybrid entity combining characteristics of corporations and partnerships.

The income earned from consultancy services under the Polish sole proprietorship was subject to lump-sum taxation on registered income.

Given the unlimited tax liability in Poland, the taxpayer questioned whether income earned from the U.S. LLC must also be declared in the Polish tax return. Additionally, the taxpayer also sought confirmation on whether he could choose from all available tax methods for individual business activities and whether it was permissible to apply different tax methods to income derived from the Polish sole proprietorship and the U.S. LLC.

Source of Income

According to the taxpayer’s description, the LLC is treated under U.S. tax law as a pass-through entity, meaning that its income and expenses are taxed at the level of its partners rather than the entity itself.

DKIS confirmed that under Polish regulations, income earned by a Polish tax resident from participation in a U.S. LLC is subject to taxation in Poland. This income should be classified as non-agricultural business income, which may entail the obligation to calculate and pay monthly tax advances.

However, to fully assess the tax obligations of a Polish tax resident, the provisions of the relevant Double Taxation Avoidance Agreement [DTA] must be taken into account, as they may influence the taxation method for income earned from a U.S. LLC.

Business Income under the DTA

According to Article 8 of the Poland–U.S. DTA, business profits of an enterprise from one country are taxable only in that country unless the enterprise operates in the other country through a permanent establishment located there.

In evaluating whether participation in a foreign partnership such as a U.S. LLC results in the creation of a permanent establishment in the U.S., DKIS referred to international tax literature and concluded that a Polish taxpayer’s participation in a U.S. LLC constitutes a permanent establishment in the U.S. under the DTA.

As a result, income earned from participation in a U.S. LLC may be subject to taxation both in the U.S. (due to the presence of a permanent establishment) and in Poland (due to the taxpayer’s unlimited tax liability). However, in Poland, the tax credit method for avoiding double taxation applies. Under this method, the taxpayer may deduct U.S. federal taxes paid from his Polish tax liability, in accordance with Polish PIT regulations.

The Proper Taxation Method

The standard taxation method for income from individual business activity in Poland is the progressive tax scale (general tax rules). However, taxpayers may opt for other methods, such as the flat-rate tax or lump-sum taxation on registered income.

The general tax rules and flat-rate tax are specified in the Personal Income Tax Act [PIT Act]. On the other hand, the lump-sum taxation method is governed by a separate legal act, which is relevant to DKIS’s further analysis in this case.

According to the PIT Act, it is not possible to apply different taxation methods for individual business income regulated by the same act. In other words, the choice of taxation method applies to all forms of individual business activity covered under the PIT Act.

However, it is permissible for the Polish sole proprietorship to be taxed using lump-sum taxation while income from the U.S. LLC is taxed under general rules or the flat-rate method. This combination of tax methods is allowed and is not excluded by either of the referenced acts. Furthermore, income earned from participation in the LLC does not affect the income limits set forth in the lump-sum taxation regulations.

It is worth noting that the Act on Lump-Sum Taxation allows for lump-sum taxation only for specific types of entities, and foreign transparent entities such as U.S. LLCs are not covered by these provisions.

Legal Basis

• The Act of July 26, 1991, on Personal Income Tax (Journal of Laws 2024, item 226, as amended).
• The Act of November 20, 1998, on Lump-Sum Taxation of Certain Income Earned by Individuals (Journal of Laws 2024, item 776, as amended).
• The Convention between the Government of the Polish People’s Republic and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed in Washington on October 8, 1974.

Tax Ruling

• Tax ruling dated November 4, 2024, ref. no. 0112-KDIL2 2.4011.584.2024.1.AG