The Polish Deal revolutionises personal income taxes (PIT). On the one hand, taxpayers will benefit from an increased tax-free amount but, on the other hand, the rules for calculating and deducting health insurance contributions will change. Many changes also apply to property owners and companies that are not CIT taxpayers.
Change of tax-free amount and tax thresholds
- The tax-free amount will be increased to PLN 30,000 and will apply to all taxpayers who pay income tax according to the progressive tax rates. At present, the tax-free amount is decreasing and does not apply to people whose income exceeds PLN 127,000 per year.
- The 32% rate will apply to income over PLN 120,000 per year. Currently, it applies to income above PLN 85,528.
Removing the possibility to deduct health insurance contributions from taxable income
- Currently, health insurance contributions of 9% of the tax assessment basis are tax-deductible at a rate of 7.75% of the same tax basis. The reforms will remove the possibility to deduct health insurance contributions from personal income tax amounts.
- To mitigate the effects of being unable to deduct health insurance contributions, employees and sole traders whose income is taxed at progressive tax rates will be entitled to apply the so-called middle class tax relief. However, this only applies to persons with an annual income below PLN 133,692.
New rules for calculating health insurance contributions by sole traders
- The amount of health insurance contributions for those who pay tax according to the progressive tax scale remains unchanged at 9% of income.
- The amount of health insurance contributions for sole traders who pay the 19% linear PIT rate will be 4.9% of income minus social security contributions (being not less, however, than 9% of the minimum wage).
- For those who pay lump sum taxation on recorded income, the base for calculating 9% of the health insurance contribution will depend upon the taxpayer’s average remuneration in the fourth quarter of the previous year and their annual income.
- For taxpayers whose annual income is:
- up to PLN 60,000 – the contribution will be 60% of the average national wage (currently approx. PLN 300),
- up to PLN 300,000 – 100% of the average national wage (currently approx. PLN 500),
- over PLN 300,000 – 180% of the average national wage (currently approx. PLN 900).
- The legislation also enables health insurance contribution rates to be calculated on the basis of income from the previous tax year for persons who conducted business activities taxed according to progressive tax rates or at a flat rate of 19%.
- Throughout the year, health insurance contributions will be calculated progressively depending on the amount of income earned from the beginning of the year (i.e. 60%, then 100% then 180%). Accordingly, it may be necessary to make an annual contributions payment for months when a lower rate was applied than should have applied in light of the taxpayer’s ultimate annual income amounts.
- It will also be possible to apply for a refund of overpaid health insurance contributions within one month after the deadline for submitting a tax return.
- Persons who do not obtain income from business activity, as defined in the Personal Income Tax Act (e.g. partners in limited partnerships) will pay a flat-rate health insurance contribution of 9% of their average monthly salary from the fourth quarter of the previous year.
- The reforms also affect the deadlines for paying social and health insurance contributions. From 2022, such deadlines will be harmonized. Contributions for health and social insurance will be payable by the 20th day of the following month.
Health insurance contributions on salaries for appointments
- The Polish Deal makes it compulsory to pay health insurance contributions on the remuneration of persons appointed to perform functions under an act of appointment (e.g. management board members or proxies).
- To date, the obligation to pay health insurance contributions did not apply to such remuneration.
Relief for the protection of monuments
- Owners or co-owners of real estate which is entered in the register of monuments or listed as a registered monument will be entitled to deduct part of the renovation expenses from their taxable income from 2022.
- The tax relief applicable to the renovation of a monument will also apply to part of the costs of purchasing a historic property.
Relief after returning from emigration
- Taxpayers who transfer their place of residence to Poland and become Polish tax residents will (after meeting certain conditions) be entitled to deduct an individually-determined amount from their annual tax payments for four subsequent tax years, starting from the end of the base year.
- The base year will be the year selected by the taxpayer:
- in which he/she transferred their place of residence to Poland, or
- for another year.
- The deductible amount will depend upon the amount of tax payable in the base year and the three subsequent years.
- The deduction will be made in the tax return.
Lump sum on foreign income earned by so-called High Net Worth Individuals
- The Polish Deal introduces a new form of lump sum taxation payable on foreign income earned by people who decide to transfer their tax residence to Poland.
- Lump-sum taxation will apply to revenues obtained outside Poland (foreign revenues), excluding revenues obtained through so-called Controlled Foreign Companies (CFCs).
- The lump sum amount is PLN 200,000, regardless of the amount of foreign revenue.
- The possibility to use this form of taxation only applies if, in the relevant tax year, the taxpayer incurred at least PLN 100,000 in costs for economic growth, the development of science and education, the protection of cultural heritage or the promotion of physical culture.
- It will be possible to apply the lump sum taxation method for 10 consecutive tax years.
Additional costs for employers who illegally hire employees
- The planned reforms will attribute to an employer any income connected with the illegal employment of an employee or any failure to report the correct amount of income arising from an employment relationship. They will also make an employer fully liable for the related tax and social security contributions (while simultaneously excluding the employee’s liability for these obligations).
Reforms affecting the use of cars
- Taxing the sale of movables after leasing
- The reforms will result increase the calculation of a taxpayer’s income from business activities by the value of any revenue acquired from the post-leasing sale of cars and other movables purchased under an operating lease to private property.
- If a sole trader sells such property within 6 years from the original purchase date, the sale revenues will qualify as business income.
- Depreciation of assets purchased prior to starting business
- The proposed reforms assume that the basis for calculating the depreciation of a company’s new asset will be its real value, taking into account its previous usage. The initial value of an asset used for private purposes before being entered into the records of a company’s fixed assets and intangible assets is determined as its purchase price or its market value if this is lower than the purchase price.
Reforms affected leased buildings and residential premises (applicable from 2023)
Changes in the depreciation rates of buildings and residential premises
- The new regulations exclude the possibility of applying depreciation rules to residential real estate and rights. This means that, as of 2022, it will not be possible to include depreciation write-offs on buildings and residential premises as tax costs.
Change in taxation rules for income from rental or lease
- Revenues from renting, subletting, leasing or subleasing and other contracts of a similar nature are – unless they are obtained as part of business activity – subject to lump sum taxation based on the amount of recorded income. The lump sum payable on such income remains unchanged at 8.5% of revenues in respect of the first PLN 100,000 and 12.5% of revenues from any higher income amounts.
- To date, lump sum taxation on recorded income was an optional form of taxation, whereas the default form of taxation was the generally-applicable progressive tax scale.
Reformed regulations on flat-rate personal taxation and liquidation of the tax card
- The reforms reduce some lump sum rates on recorded income, primarily for people working in medical and technical professions.
- Income derived from providing healthcare services will be taxed at a uniform 14% flat rate regardless of whether such services are provided in person or via employees. Income derived from providing technical services will be taxed likewise. Currently, such income can be taxed at two lump sum rates, namely 17% or 15%, depending on whether they are earned personally or via employees.
- The reforms would create an additional, lower flat rate of 12% applicable to income earned from providing certain IT services that are currently taxed at 15%.
- The Polish Deal introduces a completely new legal institution, namely a voluntary income tax payable on income derived from sources that have not been declared for taxation in Poland.
- The tax is temporary. Any entities interested in disclosing previously untaxed income to the Polish tax authorities will be able to do so until the end of 2022.
- The transitional lump sum will be 8% of the tax base.
- After paying the tax, it will be possible to use an additional tax deduction of 30% of the lump sum if, within one year of submitting the application, the taxpayer invests at least the equivalent amount of the declared income into inter alia fixed assets, shares or stocks which generate income that is taxable in Poland.
- It is necessary to pay for an application to apply the transitional lump sum tax. The fee is 1% of the reported income, capped at a maximum of PLN 30,000. Before submitting an application, it will be possible to ask the newly-created Council for Capital Repatriation to issue an opinion on the impact of applying the lump sum tax. The fee payable to receive the Council’s opinion is PLN 50,000, so this is a solution which seems suitable only for entities whose undisclosed income is very high.
Changes to the taxation of partnerships that are not CIT taxpayers
- The Polish Deal changes the classification and taxation payable on revenues earned from reducing capital participation in a partnership (not being a CIT taxpayer), receiving property in connection with the liquidation of such a partnership and the withdrawal of a partner from such a partnership.
- Revenues from non-agricultural business activities will include revenues derived from reducing a shareholder’s capital contribution in the form of:
- cash (any “retained profits” in the partnership, proportionate to such shares, will not be taxed, but such sums shall be reduced by the value of any payments made in connection with these shares and any expenses which do not constitute tax-deductible costs); and
- assets other than shares, stocks, securities, participation units in capital funds and derivative financial instruments, and also any assets in respect of which Poland loses the right to tax them if they are sold after 6 years.
- If a partner of a partnership receives shares, securities, participation titles in capital funds or derivative financial instruments due to the liquidation of the partnership, this will not be subject to taxation but any income earned from the possible disposal thereof will be taxable in Poland.
- If, following a partner’s withdrawal from a partnership, or its liquidation or a reduction in its share capital, a partner is issued with assets and Poland is unable to tax any income earned from the disposal of such assets when they are received, the partner is deemed to have generated income which is credited as “money capital”. The 19% lump sum tax applies to any income which is above the market value of the received assets over costs (e.g. for their purchase or production) incurred by the partnership or partner.
The cost of obtaining income from the sale of shares (stocks) in a partnership resulting from the transformation of a company that is not a legal person
- The current regulations contain no specific rules to determine the value of tax-deductible costs in connection with income derived from selling the shares of a limited company established as a result of the transformation of a partnership.
- The Polish Deal regulates this issue by stating that costs incurred by a partner for acquiring or subscribing to the right to acquire shares in a partnership transformed into a limited company will qualify as tax-deductible costs. Such costs will be increased by any “retained profits” attributable to that partner, but decreased by any payments made to the partner as a share of the company’s profits.