What types of changes does the “Polish Governance” propose to make to taxes and insurance charges that may affect employers, employees and contractors? 

Personal income tax

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

The draft changes anticipate 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.

According to the proposed changes, raising the tax-free income personal allowance will mean that if the taxable income is no higher than PLN 2,500 per month, no tax will be due. If that amount is higher than PLN 2,500, then a personal income tax (PIT) advance will be due, and the payer will have to withhold it. 

Spouses who file joint returns will have double that tax-free income: for them the tax-free income personal allowance will total PLN 60,000. 

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

• Raising the tax bracket to PLN 120 thousand  

According to the draft changes, 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 using 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 Governance will be neutral to 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 x 0.06684549 – PLN 4,572.00) ÷ 0.17, for A amounting to at least PLN 68,412 but not exceeding PLN 102,588, 
• (A x (-0.07346090) + PLN 9,821.75) ÷ 0.17, for A higher than PLN 102,588 but not exceeding PLN 133,692, 

where A is supposed to denote income from an employment relationship obtained by a taxpayer in a tax year. 

Persons who generate revenue to which the 50% tax-deductible rule applies on account of being creators under copyrights and performing artists under neighboring rights will not be able to take advantage of employee relief. 

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

• Taxation of company cars used for personal purposes

The draft changes anticipate the implementation of 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. 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:

• the employee’s income under that type of employment will be tax-exempt,
• the social insurance contributions will be wholly funded by the employer,
• the employer will have incremental income by virtue thereof equal to the minimum working wage and the remuneration paid to employee; the remuneration paid to the employee will not be a tax-deductible expense for the employer.

• Tax break for persons moving their place of residence to Poland 

Persons who move their fiscal place of residence to Poland and as a result will be subject to unlimited tax liability in Poland will have the right to deduct 50% of their total tax due computed using the tax bracket or the flat rate in their annual tax returns.
This deduction will be applicable to persons who:

• have been tax residents of another country for at least the 3 years immediately preceding the year of moving their place of residence to Poland (residence must be documented through an international certificate of residence),
• receive income from work, personal activity, business activity or copyrights,
• have their place of residence in Poland for the entire tax year for which they will take that deduction.

It will be possible to take this deduction within four consecutive years starting from the “base year”.

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

• Changes to the lump sum

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

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

Health Insurance

• Individual businesses - income-based contribution

This change will affect individual businesses that currently pay their health insurance contribution on a fixed basis regardless of their income. According to the draft changes the basis for calculating the contribution is supposed to be the actual income (revenue generated minus costs incurred) generated 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.
This change, coupled with the simultaneous inability to treat the contribution as a tax-deductible expense (more on this below), will cause their net income to fall substantially. 

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

The basis for calculating the health insurance contribution for businesses that pay a lump sum tax is supposed to be monthly business revenue minus the amount of social insurance contributions remitted. The health insurance contribution calculated on the basis determined in that way will be 1/3 of the lump sum rate applicable to the taxation of this revenue.

• 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 is 9% of the base. At present, 7.75% of the base for 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 to nearly 26% and 41% for those people who pay taxes according to the tax brackets.

Individual businesses that pay the flat tax (19%) will also be stripped of the possibility of treating the health insurance contribution as a tax-deductible expense, which will raise their burden to roughly 28%.

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The information above was prepared on the basis of the published bill concerning the Act on Amending the Personal Income Tax Act, the Corporate Income Tax Act and Some Other Acts to introduce the “Polish Governance”. This draft is currently undergoing social consultations and may change during further legislative work. 

Read more about the Polish Governance