The law implementing the “Polish Deal” has been accepted by the Government and forwarded to the parliament to conduct legislative work. The first reading is scheduled for Friday, 17 September.
Below we present the current list of regulations whose entry into force will be the most significant from the vantage point of the tax and social insurance burden to be borne by you, your employees and contractors.

PERSONAL INCOME TAX

• Raising the tax-free income personal allowance to PLN 30 thousand

The law anticipates raising the tax-free income personal allowance for all taxpayers who pay tax in tax brackets to PLN 30,000, meaning employees, contractors, management board members, persons working under management contracts, etc. The tax-free income allowance is embedded in the tax brackets. The allowance is not linked to the amount of income earned by a taxpayer.

Businesses that pay a flat-rate tax (19%) or a lump sum tax will not be able to benefit from the tax-free income allowance.

The tax-free income allowance equal to 1/12 of the amount reducing the tax (5,100 ÷ 12) will be applicable by a taxpayer when personal income tax advances are withheld provided that the taxpayer submits the pertinent declaration by a specified deadline.

• Raising the tax bracket to PLN 120 thousand

According to the law, the tax bracket will be raised but the tax rates will remain unchanged.

A tax rate of 17% will be applicable to annual income that does not exceed PLN 120,000. Income in excess of PLN 120,000 will be taxed at the 32% rate.

This change also pertains to individual businesses that pay tax according to the tax brackets.

• Employee relief

Changes will also include the introduction of employee relief, also referred to as the “middle class tax break”.
This relief is supposed to ensure that the changes implemented under the Polish Deal will be neutral for employees who earn income from an employment relationship ranging from PLN 68,412 to PLN 133,692 per annum. It should be as follows:
a.    (A x 6.68% – PLN 4,566.00) ÷ 0.17, for A amounting to at least PLN 68,412 and not exceeding PLN 102,588
b.    (A x (-7.35%) + PLN 9,829) ÷ 0.17, for A higher than PLN 102,588 and not exceeding PLN 133,692

Where A denotes the income generated by a taxpayer in a tax year in a business relationship, employment relationship, cottage industry and cooperative employment relationship that is subject to taxation according to the tax brackets.

The calculation of this relief has been slightly simplified compared to the algorithm in the bill. In addition, persons who generate revenue to which the 50% tax-deductible rule applies by virtue of exercising copyright have been included among the persons eligible for this relief.

The employee relief is supposed to be deducted from pre-tax income.

Persons employed on the basis of civil law agreements and individual businesses will not be able to benefit from this relief.

Employers will apply the employee relief when calculating the monthly witholding tax advances unless an employee submits a request for it not to be applied.

• Taxation of company cars used for personal purposes

The changes implement a regulation to set the value of the benefit for hydrogen and electric vehicles and a modification to the criterion for setting the value of this benefit when it comes to vehicles powered by conventional combustion engines.  The monthly value of this benefit is supposed to be PLN 250 for hydrogen and electric vehicles and for cars whose engine capacity is up to 60 kW (approximately 80 KM). The monthly value of this benefit for other cars is supposed to be PLN 400.

• Illegal employment

In case of illegal employment understood to mean an employer employing a person without written confirmation by the required deadline of the type of agreement executed and its terms and conditions:

1. the employee’s income under that type of employment will be tax-exempt,
2. the social insurance contributions will be wholly funded by the employer,
3. employers will be obligated to determine their own incremental income equal to the sum total of the value of the work done by an illegally employed person (constituting the equivalent of the minimum wage for work) and that person’s income by virtue of his or her illegal tax-free employment (the income equal to the value of the work will also be determined if the remuneration on account of illegal employment is in fact paid to an employee),
4. the remuneration paid to an illegally employed person will not be tax-deductible.

• Income exemption for persons moving their place of residence to Poland

Persons who move their fiscal place of residence to Poland and who as a result will be subject to unlimited tax liability in Poland will have the right to receive an income exemption of up to no more than PLN 85,528 in a tax year. This income exemption pertains to income from work, a mandate agreement and individual business activity taxed according to the tax brackets, the flat-rate tax or the lump-sum tax and also to benefit from the 5% tax as part of the IP box.
This exemption will be applicable after satisfying certain conditions pertaining, among others, to citizenship, period of living abroad and the country of residence prior to moving to Poland.
It will be possible to take this deduction within four consecutive years starting from the “base year”.

This deduction also pertains to foreigners who move their place of residence to Poland, e.g. in connection with being posted to work in Poland.

• Deducting membership dues paid to trade unions

Membership dues paid to trade unions are supposed to be deductible from taxable income up to an amount not to exceed PLN 300 in a tax year. This amount will be deductible from income taxed according to the tax brackets in the annual tax declaration.

• Changes to the lump sum

The Polish Deal calls for reducing the rates of lump sum income tax applicable to revenue on some types of business activities:

1. to 14% on rendering services in health care, architecture and engineering services,
2. to 12% on services involving the release of software packages and computer hardware advisory services and software-related services.

HEALTH INSURANCE

• Individual businesses paying a flat rate tax - contribution of 4.9%

This change will affect individual businesses that currently pay their health insurance contribution on a fixed basis regardless of their income. The basis for calculating the contribution is supposed to be the actual income (revenue generated minus costs incurred) earned by businesses minus the amount of social insurance contributions remitted in a given year. If this income is lower than the minimum wage in January of a given year, the basis for calculating the contribution will be the minimum wage. The rate of health insurance will be 4.9% of the base, though no less than 9% of the minimum wage in force on the first of January of that year.
This change, coupled with the simultaneous inability to treat this contribution as a tax-deductible expense (more on this below), will reduce the net income of businesses.

Those businesses that pay taxes according to the tax brackets will pay a health insurance contribution of 9%.

• Health insurance contribution in business activity taxed in the form of a lump sum

The annual basis for calculating the health insurance contribution for businesses that pay a lump sum tax is supposed to be the following:

1. the product of the number of months in a calendar year during which they are subject to health insurance and of the amount equal to 60% of the average monthly wage if the income generated in this period does not exceed PLN 60,000,
2. the product of the number of months in a calendar year during which they are subject to health insurance and of the amount equal to the average monthly wage if the income generated in this period exceeds PLN 60,000 but does not exceed PLN 300,000,
3. the product of the number of months in a calendar year during which they are subject to health insurance and of the amount equal to 180% of the average monthly wage if the income generated in this period exceeds PLN 300,000.

• Remuneration of Management Board members as the basis for the contribution

After the regulations are changed, persons appointed to serve in their capacity on the basis of an act of appointment who receive remuneration by virtue thereof, e.g. management board members who receive remuneration on the basis of a supervisory board or shareholder meeting resolution are supposed to be subject to compulsory health insurance. The contribution will be 9% of a management board member’s income and it will not be tax-deductible.

• Inability to treat the contribution as a tax-deductible expense

The health insurance contribution will be 9% or 4.9% of the base. At present, part of the health insurance contribution is tax-deductible. After these changes take effect, it will no longer be possible to treat a portion of the health insurance contribution as a tax-deductible expense. In practice, this will lead to an increase in the total real charges for taxes and health insurance.

SOCIAL INSURANCE

• Social insurance contributions payable on all mandate agreements

The principle of social insurance contributions being payable on all mandate agreements announced in the assumptions for the Polish Deal is not included in the draft legislation submitted to the parliament. Press reports suggest that modifications are currently being drafted in this regards.

More about Polish Governance:

changes to employee taxes

changes to taxes and insurance charges