Polish Order and entrepreneurs

On November 15, President Andrzej Duda signed the Act of October 29, 2021 amending the act on tax on goods and services and certain other acts (hereinafter the "Act"), which is part of the changes introduced under the so-called Polish Order (hereinafter the "Polish Order"). The changes will come into force on January 1, 2022.

As part of the Polish Order, more than twenty acts will be amended, including: the Personal Income Tax Act, the Corporate Income Tax Act, the Value Added Tax Act, the Social Insurance System Act, and the Lump-sum Act income tax on certain revenues earned by natural persons.

Since the government's press conference on May 15, 2021, at which the first assumptions of the Polish Order program were presented, the changes raise a number of doubts among experts and entrepreneurs, and result in some of them looking for methods that could optimize future levies. The amendment to tax laws introduces many changes in the field of tax burdens, and they will primarily affect entrepreneurs running a sole proprietorship.

As of today, entrepreneurs running a sole proprietorship can use four forms of taxation. Two of them: a tax card and a lump sum on recorded income can be classified as simplified forms of taxation. From January 1, only entrepreneurs who used this form before the new regulations enters into force, i.e. before January 1, 2022, will be able to take advantage of taxation in the form of a tax card, because the Polish Order will eliminate the possibility of choosing this form of taxation from the new year.

The most important changes and their effects for entrepreneurs

The changes most often analysed and commented on by experts, but also by entrepreneurs themselves, concern (a ) the elimination of the possibility of deducting health insurance contributions from tax, (b) changing the contribution rate for entrepreneurs taxed on a linear basis, which will amount to 4.9% of the calculation basis; for entrepreneurs taxed according to general rules, the contribution will amount to 9% of the basis of assessment. To illustrate the scale of changes, the following example should be used: in the case of income at the level of  PLN 1,000,000, the health insurance premium is currently paid in a fixed amount of PLN 381.81, after the amendments come into force, i.e. from January 1, 2022 for a taxpayer taxed with a linear premium health care will amount to PLN 49,000, and for a taxpayer subject to general taxation, it will be PLN 90,000. Importantly, these amounts will not be deductible from personal tax.

As part of the Polish Order, the tax-free amount has also changed, which will amount to PLN 30,000 from January 2022. zloty. Entrepreneurs taxed on general terms will benefit from this change, while entrepreneurs taxed on a linear basis will not be able to do so.

The entry into force of the above changes, unfavourable for entrepreneurs, especially for those who settle with the straight-line method, results in their search for solutions that will minimize the burden. The available variants that they can use are, among others - using the form of taxation which is a lump sum on recorded revenues, transforming a sole proprietorship into a limited liability company or a limited partnership.

Lump sum on registered revenues

The lump sum on recorded revenues consists in paying the tax, the basis of which is income, so the taxpayer cannot reduce the tax amount by tax deductible costs. It is worth noting that from January 2022, more favourable rates will apply - 12% for the IT industry (15% by the end of 2021) and 14%. for engineers and doctors (change from 17%).

However, not every entrepreneur is entitled to benefit from taxation in the form of a lump sum. This form is intended only for persons running sole proprietorships, including partners in civil partnerships and general partnerships (subject to the fact that only natural persons are the partners of such a company). In addition, the taxpayer loses the right to tax with a lump sum if his income exceeds the amount of EUR 2,000,000.

A significant drawback of lump sum taxation is the inability to benefit from middle class tax relief. This relief is introduced in the Polish Order, and it is available to persons taxed on general terms, with revenues between PLN 68,412 and PLN 133,692.

The amount of the health contribution under the lump sum taxation

Entrepreneurs taxed with a lump sum on registered revenues will pay a 9% health insurance contribution, and three assessment bases will apply:

(a) with annual revenues up to PLN 60,000 - 60% of the average remuneration,

(b) with annual revenues up to PLN 300,000 - 100% of the average remuneration,

(c) with annual revenues exceeding PLN 300,000. - 180% of the average salary.

The declaration on the choice of taxation in the form of a lump sum on revenues recorded for a given tax year should be submitted by the entrepreneur by the twentieth day of the month following the month in which he achieved his first income in the tax year. The changes should therefore be made by February 20, 2022.

Transformation into a limited liability company

A solution that will probably be used by some entrepreneurs conducting sole proprietorship is also the transformation of the current form of business into a limited liability company.

A limited liability company gives the entrepreneur greater financial protection, as the partners of the limited liability company they are not liable with their private property for the company's obligations towards creditors, but are only liable up to the amount of their contribution.

Taxation of a limited liability company

The income of a limited liability company is taxed with the corporate income tax (CIT) in the amount of 19%. However, it is possible to use the 9% tax rate. The so-called small taxpayers, i.e. limited liability companies, whose operating revenues in a given tax year did not exceed the amount of EUR 2 million.

However, what should be considered under Art. 19 paragraph 1a point 2 and 3 of the Corporate Income Tax Act, the use of the above option is limited. It is forbidden to apply a reduced rate of corporate tax in a situation where the company was created as a result of transformation from a sole proprietorship, and also when a previously operated enterprise, an organized part of an enterprise or assets of this enterprise with a total value exceeding the equivalent in PLN for the amount of at least EUR 10,000.

However, it is worth emphasizing that the above limitation is only temporary and applies to the tax year in which the limited liability company started its operations and the next tax year immediately following it. With this in mind, it should be emphasized that an entrepreneur who transforms his sole proprietorship into a limited liability company in 2021 will be entitled, while maintaining the revenue limit, to benefit from a preferential 9% rate from 2023.

In a situation where the partners of a limited liability company decide to pay dividends, these payments are subject to tax at the rate of 19%, so there is a phenomenon of double taxation. However, if the partners decide not to do so due to, for example, the planned retention of funds in the company for further development, the profit left in the company is subject to taxation only at the 9% rate (if the company is a small taxpayer) or at the 19% rate.

Not being subject to ZUS contributions

When running a business in the form of a multi-person (minimum two-person) limited liability company, partners are not subject to the obligation to pay health insurance or social security contributions. An exception to the above rule takes place when a limited liability company is a sole proprietorship, in which case the partner will be obliged to pay health and social contributions. The sole shareholder is recognized by the regulations as a person running a non-agricultural business activity, and such persons are obliged to pay social security contributions and health insurance contributions.

In addition, partners, unlike entrepreneurs running a sole proprietorship, are not subject to the so-called solidarity levy, i.e. a tax amounting to 4% of the surplus over the amount of one million zlotys of income.

Running a business in the form of a limited liability company may be beneficial for entrepreneurs for whom taxation in the form of a lump sum on recorded revenues is not profitable due to the costs incurred (as already indicated, the tax cannot be reduced by tax deductible costs) and for entrepreneurs whose the goal is to develop the company by using the profit generated in the company.

Limited partnership - is it a good solution?

An alternative to a limited liability company is a limited partnership. It should be emphasized that a limited partnership must consist of two types of partners - a limited partner (he does not manage the partnership's affairs and is only responsible for the limited liability amount) and a general partner (he runs the partnership's affairs and bears unlimited liability for its obligations).

In 2021, pursuant to changes in the law, the limited partnership became a taxpayer of corporate tax. Due to the changes, profits paid to partners are subject to double taxation. However, pursuant to Art. 30a paragraph. 6a of the act on tax on natural persons, the corporate tax paid by the company reduces the tax on natural persons paid by the general partner on account of the profit paid to him for a given year.

Moreover, partners of a limited partnership, after the entry into force of the Polish Order, will not pay a health insurance contribution calculated on the basis of income, but in a flat-rate amount. The contribution will amount to 9% of the base, which will be equal to the amount of the average monthly remuneration for the fourth quarter of the previous year announced by the Central Statistical Office (GUS) (in 2022, the health insurance contribution for partners of a limited partnership will amount to approximately PLN 500 per month).

Partners of limited partnerships, as well as partners of limited liability companies, are also not subject to the obligation to pay the so-called a solidarity levy.

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Estonian CIT

One of the options that an entrepreneur may lean towards is switching to the so-called Estonian CIT. On January 1, 2021, new tax regulations entered into force, consisting in the introduction of the so-called Estonian CIT, i.e. a new flat-rate system on the income of capital companies. The essence of the lump sum is that there is no obligation to pay the income tax for the business activity until the profit is distributed to the partners. In order to use the above form of taxation, the company must meet a number of requirements, including only natural persons may be partners of the company, it is necessary to employ at least three people under an employment contract.

As Deputy Minister of Finance Jan Sarnowski points out, “Estonian CIT is an option that allows companies to replace the current rules of CIT settlement with a profit distribution tax. Instead of paying tax monthly, quarterly or annually on the income earned in this period, the Estonian taxpayer pays it only on the amount that he himself decides to transfer outside the business, e.g. in the form of a dividend."

As part of the Polish Order, the rules of taxation of the so-called Estonian CIT (a) from January 1, 2022, in addition to limited liability companies and joint-stock companies, this taxation mechanism will also be available to limited partnerships and limited joint-stock partnerships, (b) a lump sum on the income of companies will also be available to companies with annual revenues exceeding PLN 100 million, (c) the rate will be 10% for the so-called small taxpayers and 20% for the so-called large taxpayers, and thanks to the available deduction mechanisms, the total effective taxation of company profits (PIT and CIT) will amount to approx. 20% for the so-called small taxpayer and 25% for the so-called large taxpayer, (d) the obligation to incur direct investment outlays in the amount specified in the regulations is also abolished.

Summary

From January 2022, entrepreneurs are waiting for revolutionary changes. For some people running a sole proprietorship, this form of business activity may turn out to be unprofitable due to the introduced legislative novelties. For this reason, entrepreneurs may decide to look for more optimal forms of business. Solutions they may consider include choosing a lump sum on revenues recorded as a form of taxation, as well as transforming a sole proprietorship into a limited liability company or a limited partnership, and as a result obtaining the possibility of using the so-called Estonian CIT.

Downloads

• PKF Alert - Polish Order and entrepreneurs.pdf [PDF]