Success in hackathons, online contests, or coding/programming competitions organized abroad, including in the United States of America (USA), is associated not only with benefits but also with tax consequences. Is a prize from abroad subject to taxation in Poland?
Yes. If the participant is a Polish tax resident (their center of vital interests is in Poland or they stay in the country for more than 183 days a year), then the income they earn, including that obtained abroad, is subject to taxation in Poland.
How should income from a programming competition be classified?
In practice, such income may be classified as:
- Income from personally performed activities, which includes, among others, scientific activities and participation in scientific competitions. A programming competition, especially one of an innovative or research-oriented nature, may fall under this category.
- Income from business activity, if participation in the competition and the resulting income is connected to such an activity.
- Income from other sources, which is less commonly applied in the context of competitions requiring active, creative participation.
Determining the correct source of the considered income is significant, as different rules apply for establishing the taxable base and for settlement (whether or not a tax remitter is involved).
For example, income from other sources is taxed according to the progressive tax scale. A 10% flat-rate income tax may apply, but only in the case of prizes from competitions within the EU and EEA (for example, a prize from the USA does not qualify for this preferential flat tax).
What do double taxation agreements provide?
The above rules may be modified based on the provisions of double taxation agreements.
For example, the agreement between Poland and the USA from 1974 does not contain separate provisions on prizes. Under this agreement, income from programming competitions is usually classified as income from the performance of an “independent profession” or “other independent activity” of a scientific or technical nature. According to the agreements, as a rule, Poland has the right to tax such income, and the USA may only levy tax if the participant stays there for more than 183 days in a tax year. If the participant pays tax in the USA, Poland applies the proportional credit method for avoiding double taxation. This means that the tax paid in the USA is credited against the Polish tax, but only in proportion to the income earned.
It is important to remember that other double taxation agreements may contain different provisions.
Summary
Winning a programming competition abroad is subject to taxation in Poland if earned by a Polish tax resident. The nature of the competition is particularly important, as it affects the proper classification of income for income tax purposes. The appropriate taxation rules must be taken into account, including the method of avoiding double taxation arising from the relevant double taxation agreement (where applicable). It is also worth remembering to keep documentation, such as confirmation of receiving the prize, bank transfers, and any tax withholdings, as they may be helpful for tax settlement in Poland.
