Taxes on investment income - protect against local currency devaluation

[alexj72]

Looking for advice on taxation of investment income. It feels to me like there should be some already existing solution for this that I am just not aware of.

Given:
- resident of Poland (where all tax return is obviously calculated in PLN)
- have income in USD/EUR for foreign customers
- working as independent professional, so all income is personal income and all taxes are paid
- capital gain tax in Poland is 19%

Intention:
I would like to invest some amount of the money I left (in USD / EUR). Let's say US bonds, that are currently giving about 5%.

However since the taxation is calculate in PLN, its quite a possibility of the following:
- Date X - invested 100k USD in gov bonds (USD/PLN rate is 4.00)
- In a year - got 105k USD back (USD/PLN rate let's say goes to 4.4)

So basically from the taxation prospective the income is:
105k * 4.4 - 100k * 4 = 62k PLN
The tax is 62k * 19% = 11,780 PLN

Which becomes $2677 (at the rate of taxation). Which is basically 53% of the whole income, instead of the appreciated 19%.

So the question is - are the any ways to "protect" against that exchange rate floating?

Ideally without establishing a company, since the company otherwise will fall under CFC rules.

 

[void]

putting aside more creative ways (like buying an asset that appreciates against not only PLN but also USD without counter party risk on top) and sticking with your approach you could maybe have a look at currency forward contracts

 

[scooterguy]

There is something wrong with your math above.

Looking for advice on taxation of investment income. It feels to me like there should be some already existing solution for this that I am just not aware of.

Given:
- resident of Poland (where all tax return is obviously calculated in PLN)
- have income in USD/EUR for foreign customers
- working as independent professional, so all income is personal income and all taxes are paid
- capital gain tax in Poland is 19%

Intention:
I would like to invest some amount of the money I left (in USD / EUR). Let's say US bonds, that are currently giving about 5%.

However since the taxation is calculate in PLN, its quite a possibility of the following:
- Date X - invested 100k USD in gov bonds (USD/PLN rate is 4.00)
- In a year - got 105k USD back (USD/PLN rate let's say goes to 4.4)

So basically from the taxation prospective the income is:
105k * 4.4 - 100k * 4 = 62k PLN
The tax is 62k * 19% = 11,780 PLN

Which becomes $2677 (at the rate of taxation). Which is basically 53% of the whole income, instead of the appreciated 19%.

So the question is - are the any ways to "protect" against that exchange rate floating?

Ideally without establishing a company, since the company otherwise will fall under CFC rules.

It is not 53% of the income, because in the assumptions that you made your profit was 62k PLN, which is over $15,000 in profit instead of only $5,000.

So, in your scenario you'd pay $2,677 for a +$15,000 profit, which is still 19%.

 

[alexj72]

Sorry, for confusion, it meant to be "So basically from the taxation prospective the _profit_ is: 62k PLN"

However since investment is made in USD (100k in the example), with 5% interest on US Gov Bonds, it will be 105k in a year. So all in all it is +$5k. However from taxation prospective it is more due to possible devaluation of PLN, which is very possible scenario.

 

[Clank]

If you invest in bonds directly you would also need to pay withholding tax.

 

[alexj72]

@Jbb1 are you sure? According to Schwab it interest income on treasury bonds is exempt from withholding tax.

Source: https://www.schwab.com.hk/public/file/P-1199417/REG30213.pdf