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Taxation regimes – which is the best one?

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​​by ​​​​​​​​​​​​​​​​​​Maria Wośkowiak

12 November​ 2024


Choosing the taxation regime is one of the most important decisions of every business venture. This choice affects not only the tax burden, but also further business growth, financial planning and payments to revenue authorities. Which taxation regime is the best? What are the advantages and disadvantages of the available regimes? ​



TABLE OF CONTENTS



What taxation regimes are available?


Businesses in Poland can choose among a few basic income taxation regimes. The most popular are:

  1. general rules (tax brackets),
  2. flat rate tax,
  3. flat tax on gross income.

The choice of the right taxation regime depends on a range of factors, such as the estimated value of revenues, line of business and the owner’s preference when it comes to tax accounting.


taxation regimes in Poland



General rules (tax brackets)


The tax brackets, also known as the general (taxation) rules, are the basic taxation regime for a business activity as well as income from employment, civil law contracts or benefits from the Social Insurance Institution (allowances, (disability) pensions). Taxpayers who follow the general rules pay tax according to tax brackets. The following rates apply in 2024:

  • 12% on income up to 120,000 zloty,
  • 32% on income above that amount.

Additionally, business owners may enjoy a tax-free amount of 30,000 zloty annually. 
The advantages of the tax brackets include the tax-free threshold and the availability of numerous tax reliefs and deductions, such as: 

  • child relief,
  • 4+ family relief,
  • social insurance contributions deductible from income,
  • relief for innovative employees,
  • prototype relief,
  • robotisation relief,
  • expansion and growth relief,
  • consolidation relief,
  • relief for purchase of a payment terminal,
  • R&D relief,
  • IP Box relief,
  • deductible donations for religious purposes, sports, culture, higher education and science,
  • rehabilitation relief,
  • internet relief,
  • thermal & heating upgrade relief,
  • blood donation relief,
  • deductible trade union membership fees,
  • relief for supporters of sports, culture and education.

The main disadvantage of the tax brackets is the 32% rate once the annual income exceeds 120 thousand zloty, and the health insurance contribution rate of 9%. Still, this is a solid option for those who want to have the tax filing status of ‘married filing jointly’ or ‘single parent’.​

Flat rate tax


In the flat rate tax regime, the business owner pays tax at 19% of income, regardless of its amount. There is no tax-free threshold and no tax reliefs. The flat rate tax regime is available exclusively to those earning income from a business activity or special agricultural production segments. 

Income is calculated in the same way for the taxation according to the general rules and at the flat rate, that is: 

net income = gross income – tax-deductible expenses

The flat rate tax regime offers, above all, predictable tax burden as the tax rate is independent of income amount. It is, therefore, good for high-earning taxpayers. 

The disadvantages of the flat rate tax include the lack of tax reliefs (e.g. child relief), no chance to account for tax with the spouse, and no tax-free threshold. That is why this taxation regime is not good for low-income taxpayers. 

Flat tax on gross income


In this taxation regime, tax is paid on gross income instead of net income. This means that you cannot deduct any expenses. The rates of flat tax on gross income vary by type of business and range from 2% to 17%.
The flat tax on gross income may prove beneficial to:

  • individuals who earn income from business activities;
  • an inherited enterprise;
  • civil law partnerships in which all partners are natural persons;
  • civil law partnerships between individuals and inherited enterprises;
  • general partnerships in which all partners are natural persons;

whose gross income in the previous tax year did not exceed 2 million euro calculated at the average exchange rate of euro, announced by the National Bank of Poland as of the first working day of October of the previous year.

The flat tax on gross income may pay off for business owners who do not incur high operating expenses – their tax returns do not disclose tax-deductible expenses. The flat tax on gross income also offers simplified bookkeeping. 

The main disadvantage of this taxation regime is that no business expenses are tax-deductible. Also, the option to file tax returns jointly with the spouse or as a single parent is not available and there is no child relief.

Which taxation regime should you choose?


The choice of the right taxation regime depends on a range of factors, including the estimated value of revenues, the company’s line of business and the organisational structure. In deciding on the taxation regime you should pay special attention to:

  • Your expected income – if it is relatively low, you may be better off choosing the flat tax on gross income or the general rules with all the tax reliefs they offer. If you expect your business and income to grow fast, the flat rate tax may be better.
  • Line of business – some taxation regimes, i.e. flat tax on gross income, offer tax rates that are preferential to other regimes for certain lines of business.
  • Bookkeeping preferences – the choice of the taxation regime will also depend on how much time you want to spend on bookkeeping. Different taxation regimes entail different recording and accounting obligations. Depending on the selected taxation regime, you will have to keep: 
  1. a revenue and expense ledger – if you go for the general rules or the flat rate tax;
  2. books of account if you exceed 2 million euro in gross income (less VAT) in the previous tax year;
  3. gross income records if you go for flat tax on gross income. Each bookkeeping method entails a different level of detail of the data.
  • Health insurance contributions – 2022 saw a revolution in the calculation of health insurance contributions, which now also affects the choice of the taxation regime. In the case of the general rules, the health insurance contribution rate is 9% of the assessment base. In the case of the flat rate tax, it is 4.9% of the assessment base, and in the case of the flat tax on gross income, the monthly health insurance rate is 9% of the flat-rated assessment base. 
  • Tax-deductible expenses – consider your anticipated expenses before you choose the taxation regime. For instance, if you choose the flat tax on gross income, you may end up paying higher taxes despite the better tax rate because you will not be able to deduct business expenses from tax.


The best taxation regime for start-ups


Business beginners often choose the taxation regime that reduces costs and formalities. One of the most frequently selected regime is flat tax on gross income, especially among sole proprietors who do not expect high costs of running their business. It is particularly attractive to small enterprises due to its simplicity and transparent accounting.

However, new entrepreneurs who do not expect annual income higher than 120 thousand zloty will find the general rules favourable. Still, if the financial forecast indicate income exceeding 120 thousand zloty, and if we consider that this tax regime does not offer tax reliefs, it may prove hardly beneficial. 

When and how can you change the taxation regime?


Taxpayers may change their taxation regime, but this must be done in accordance with specific rules and deadlines. The selected taxation regime affects the tax accounting and mid-year changes involve certain formalities. 

You can change the taxation regime by submitting a relevant statement to the head of your revenue office. Business owners registered with the Central Registration and Information on Business (CEIGD) may do it easily and quickly on-line on their Business Account at biznes.gov.pl. The statement has to be submitted by the 20th day of the month after the month in which the taxpayer earns first income from business in the year. 

For instance, a sole proprietor has chosen flat tax on gross income for several years, but has noticed that his expenses are growing and he would be better off following the general rules. He can do it at the beginning of the new year by reporting the change in the taxation regime by 20 January of the year by updating the CEIDG-1 registration form.

Summary


The choice of the taxation regime is a key decision for every business as if affects both the tax burden and the bookkeeping method. Poland offers various regimes, each of which has its own pros and cons, depending on your line of business, anticipated income and accounting preferences.

It is always good to consult your final choice with a tax adviser​​. At Rödl & Partner we have been advising businesses of all legal forms and industries for years. We will help you reduce the tax burden and adjust it to the nature of your business. 

Contact

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Monika Spotowska

Attorney at law (Poland), Tax adviser (Poland)

Associate Partner

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