What does the Polish Deal (Polski Ład) mean for sole-trader economic activity?
The Polish Deal (Polski Ład) is a flagship government package of solutions that introduces a series of changes to taxation. It has been controversial from its very inception, which is why some of its proposals are still undergoing amendments. What (probably) awaits businesspeople engaging in sole-trader economic activity in 2022?
Image author: Kelly Sikkema, source: unshplash.com
Government rhetoric states that the Polish Deal – the key aspect of which is going to be an increase in the tax-free threshold from PLN 8,000 to PLN 30,000 regardless of earnings – promises an historic reduction in taxation. For 23 million people, or 90 percent of taxpayers, the proposed changes will be favourable or neutral.
Businesspeople do not share the optimism of the Ministry of Finance. In May, the government first proposed increasing health insurance contributions to 9 percent of earnings for all taxpayers with no possibility of offsetting it against tax. These changes met with a strong reaction from businesspeople. Consequently, the Ministry of Finance decided to reduce this to 4.9 percent for taxpayers who settle at a flat rate; i.e. 19 percent.
Currently, health insurance contributions for entrepreneurs (settling according to general principles) is fixed at PLN 381.81 and equates to 75 percent of the average remuneration in the business sector for the fourth quarter of 2020, including payments from profit.
What changes is the government proposing in the Polish Deal?
The Polish Deal project was officially adopted by the government on 8 September 2021. In the interim, more corrections and amendment proposals have appeared. On 29 September, Minister Łukasz Schreiber announced that Prime Minister Mateusz Morawiecki was recommending the proposal of an amendment to introduce a tax relief for sole traders with monthly earnings of up to PLN 13,000 settling according to the tax scale.
Within the framework of sole-trader economic activity, entrepreneurs will have a choice of three forms of taxation:
- taxation based on general principles,
- i.e. according to tax scale;flat-rate tax;
- lump-sum payment on registered revenues.
New taxpayers from 2022 will no longer be able to choose a tax card. Only persons settling accounts in this way in 2021 will retain such possibility.
Changes for taxpayers settling according to taxation scale of 17 and 32 percent.
The largest and most hotly debated change is that businesspeople operating as a sole trader will not be able to write off health contributions against tax. Until now, they have been able to. Compensation for the non-deductibility of health contributions may be made in the form of relief on innovation, business development, or the so-called Estonian CIT tax.
Proposed changes for entrepreneurs settling according to the tax scale (as at the end of September 2021):
- a tax-free amount of up to PLN 30,000;
- an increase in the first tax threshold from PLN 85,528 to PLN 120,000;
- a health insurance contribution of 9 percent of income.
Linear (flat-rate) tax
The health insurance amount for persons engaging in business activities and paying tax according to a linear rate at 19 percent is expected to amount to 4.9 percent of income. Linear taxpayers will not be able to benefit from the new, increased tax-free amount.
1.35 million persons pay tax in from of a lump sum. Three rates of health insurance contributions are envisaged for entrepreneurs paying lump sum tax on recorded revenue. Their contribution shall be calculated based on an assessment that shall be equal to:
- 60 percent of the average remuneration against an annual income of up to PLN 60,000 – the contribution will amount to approximately PLN 300;
- 100 percent of the average remuneration against an annual income of up to PLN 300,000 – the contribution will amount to approximately PLN 500;
- 180 percent of the average remuneration against an annual income of more than PLN 300,000 – the contribution will amount to approximately PLN 900.
Good news for taxpayers is a reduction of the lump sum. Instead of paying 17 percent, doctors, nurses and engineers will pay 14 percent. Meanwhile, representatives of the IT sector, programmers and developers will pay 12 percent instead of 15 percent. The tax rate scale for lump sum will be between 3 and 14 percent, with a rate of 8.5 percent applying to the majority of services.
Within the changes introduced in the Polish Deal, the scope of professions entitled to be taxed with a lump sum has been extended. Practically everyone will be able to avail themselves of it: architects, accountants, lawyers, financiers, insurance agents, physiotherapists, midwives, nurses, accountants and tax advisers. The ceiling for lump sum settlement is PLN 2 million.
The contribution will be based on the minimum monthly remuneration in the business sector in the fourth quarter of the preceding year. At a rate of 9 percent, entrepreneurs will pay contributions of about PLN 270.
Who will gain and who will lose with the Polish Deal?
According to the ministry, around 40 percent of the self-employed will benefit from the Polish Deal. The project will create a support for micro-enterprises whose monthly income does not exceed PLN 6,000. The remaining 1.5 million will pay higher taxes.
Analysts think that the proposed changes will, in practice, also benefit those who earn more than PLN 13,500 per month. According to an analysis carried out by Grant Thornton, most entrepreneurs with a monthly income of around PLN 10,000 are now choosing to move from a tax scale to a flat rate tax. When the new regulations enter into force, this threshold will rise to PLN 15,000, regardless of whether the health insurance premium will be at 9 percent (as originally assumed), or at 4.9 percent, as currently expressed in the project.
According to the calculations presented by Jan Sarnowski, Deputy Minister of Finance, a businessperson earning PLN 10,000 per month (the Minister did not specify whether this is net or gross) settling in a flat rate currently pays a monthly health insurance fee of PLN 53.03. After the changes, and with a fee of 4.9 percent of income, this person would pay PLN 437.29.
Multiple comments were made suggesting that the new taxation proposals will not only encourage flat-rate taxation to be abandoned, but also discourage people from engaging in sole-trader activity altogether. As a result, it may be more advantageous for some entrepreneurs to work under a contract of employment. This is also intended to be a way of standardising the labour market, since many sole-trader entities were set up as bogus self-employment. Out of 2.5 million companies in Poland, as many as 1.6 million are sole trader companies. A proportion of these are self-employed individuals. According to the OECD, up to 20 percent of all employees are employed in this way, which places Poland among the top ten countries in the world in terms of the percentage of people who are self-employed.