On 1 October 2021, the Sejm passed a bill introducing numerous changes to taxes, health contributions, leasing settlements, and other areas. The package is commonly called the Polish Deal. This article was published on 26 October 2021.
The bill was not yet in force. It had been sent to the Senate, and the author expected that some amendments would be made. The changes discussed below were expected to take effect from 1 January 2022, but could still change. This is a historical account of the proposal as described at that time.
The article focuses on changes expected to matter most to business owners, while noting that the Polish Deal also contained many other provisions.
The Polish Deal and the health insurance contribution
One of the most important and controversial proposed changes concerned how entrepreneurs would calculate their health insurance contributions. At the time, entrepreneurs generally paid a fixed contribution, a substantial part of which could be deducted from personal income tax (PIT), so the effective burden was relatively low.
Under the bill, both the calculation of the contribution and the ability to deduct it from PIT were to change. The proposed contribution depended on the chosen form of taxation:
- For taxpayers using the progressive tax scale, the contribution would be 9% of income.
- Entrepreneurs using the flat tax rate would generally pay 4.9%, but the contribution could not be lower than 9% of the minimum wage for the relevant year.
- For taxpayers using the lump-sum system, the rate would be 9%, calculated on a base that depended on revenue. Depending on revenue, that base would range from 60% to 180% of the average monthly wage.
Most importantly, the health insurance contribution would no longer be deductible from PIT. The author’s assessment was that entrepreneurs’ actual tax burden would therefore rise substantially.
The higher contribution and loss of the deduction were intended to be offset by a so-called middle-class relief, which was also to cover entrepreneurs taxed under the progressive scale.
The relief was intended only for people with annual revenue from PLN 68,412 to PLN 133,692. In the bill’s then-current form, its rules were imprecise and relied on complicated formulas to adjust the taxable base. It was also unclear whether a taxpayer had used the relief correctly during the year; this would become known only after the year ended.
The author concluded that the higher contribution and loss of the deduction would significantly increase entrepreneurs’ effective tax burden. For a person using the flat tax, the effective rate after the proposed changes could exceed 26%.
See how to avoid the health insurance contribution:
Higher tax-free allowance and higher first tax threshold
The bill proposed increasing the PIT tax-free allowance for all taxpayers to PLN 30,000. After the change, the tax-reducing amount would no longer decrease as income rose.
The income threshold above which the 32% tax rate applied would also increase from PLN 85,528 to PLN 120,000.
In theory, these changes were intended to offset, among other things, the higher health insurance contribution.
Health insurance contributions on management board members’ remuneration
The proposed changes also affected management boards of Polish limited liability companies.
At the time, serving as a management board member by appointment and receiving remuneration for that role did not, in itself, create a title to social or health insurance. The remuneration was subject only to PIT under the progressive tax scale.
A popular arrangement was to pay a management board member under a resolution, up to the limit of the first tax bracket. The remuneration was then taxed at 17% PIT, without social insurance contributions (ZUS).
The Polish Deal bill was expected to change this. Under the adopted bill, such remuneration would be subject to mandatory health insurance. Starting in 2022, income received for management board duties under an appointment resolution would form the base for a mandatory 9% health insurance contribution, which, as described above, could not be deducted from tax.
The author therefore expected the actual tax burden on management board remuneration to rise by a further 9%. The highest earners, with income above PLN 1 million, could pay tax at a rate of 45%.
Check whether switching to a limited liability company would still be worthwhile:
Lower lump-sum income tax rates
The Polish Deal was to change lump-sum tax rates for certain categories of recorded revenue. In particular, it proposed lowering the rate to 12% for revenue from some IT services and to 14% for revenue from, among other things, healthcare, architectural, and engineering services.
These rates would still have to be increased by the mandatory health insurance contribution, most of which had previously been deductible from tax. The author’s view was that the effective tax burden would therefore rise again.
Private rental taxed only under the lump-sum system
The changes would also affect people who invested their savings in rental properties.
At the time, income from private rental could be taxed under the progressive scale unless the taxpayer chose the lump-sum system. The Polish Deal would remove the option to use the progressive scale for this income.
As a result, a property owner would no longer be able to deduct costs from the taxable base, including depreciation of the property’s value. The author noted that depreciation of a property’s often substantial value could previously allow owners to avoid tax for several years.
Under the proposed rates, the taxpayer would pay 8.5% on rental income up to PLN 100,000 and 12.5% on annual revenue above PLN 100,000.
Contrary to the initial assumptions, taxpayers would be able to use the existing rules through the end of 2022. The original plan had been to remove the progressive-scale option from January 2022.
Tax treatment of post-lease asset sales
The bill would also end the possibility of selling a post-lease car without tax in the circumstances described below.
For an operating lease, a taxpayer would have to include proceeds from selling a leased asset in business revenue if the asset had first been withdrawn from the business and the sale took place less than 6 years after the first day of the month following its withdrawal.
For example, proceeds from selling a car would have to be included in business revenue unless 6 years had passed since it was withdrawn from the business.
Under the rules then in force, the period after which selling an asset bought out from a lease into private property did not create a PIT liability was 6 months.
Tax card available only to existing taxpayers
From 1 January 2022, taxpayers were expected to lose the ability to apply to be taxed under the tax-card system.
Those already using the tax card would be able to keep it. Those who had not used it would no longer be able to choose it.
The change to the health insurance contribution deduction would also affect tax-card taxpayers. They would no longer be able to deduct the health contribution from tax. Under the tax card, the contribution would be 9% of the minimum wage. From 2022, the article estimated it at approximately PLN 270 per month.
Minimum corporate income tax
The proposed Polish Deal provisions included a new minimum tax for companies, intended in particular for large corporations, that recorded an operating loss from sources other than capital gains.
The proposed rate was 10%. The tax base would include, among other elements, 4% of revenue other than capital gains.
Under the bill, the minimum corporate income tax would not apply, in particular, to taxpayers starting a business during the year they started and the following two tax years, or to taxpayers whose shareholders were exclusively natural persons.
Estonian CIT
The Polish Deal was also intended to make the so-called Estonian CIT more attractive in Poland. The list of eligible entities was to expand to include limited partnerships and limited joint-stock partnerships.
The bill also proposed removing the requirement to incur investment expenditure and eliminating the upper revenue limit.
The stated aim was to make this form of taxation more attractive. The article described the existing form as having drawbacks and noted that, despite the government’s prominent announcements, few entrepreneurs had chosen it.
Key assumptions of the Polish Deal bill
At the time, the bill had been sent to the Senate, so the proposed changes could still change. The author considered that the provisions might take effect at the beginning of 2022, after possible amendments.
Every entrepreneur should analyze whether and to what extent the proposed changes would affect their business.
According to a calculator prepared by PwC, an entrepreneur issuing monthly invoices for PLN 10,000 net (PLN 12,300 gross) would lose the equivalent of PLN 5,963 a year under the new Polish Deal.
At the time, the author considered that tax burdens would mainly rise and would be particularly burdensome for small businesses.
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