The Taxes in Poland

THE TAXES

This subchapter gives you an overview of the selected Polish tax issues that a start-up should be aware of when doing business in Poland.

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Key elements of the Polish tax environment

The Polish tax environment, including tax administration, is rather a taxpayer friendly one. 

The tax system in Poland is, in principle, based on self-assessment, which means that the taxpayer has to calculate the tax on his / her own, file the tax declaration and pay the tax on his/her own within the deadlines determined in the tax acts. If as a taxpayer you have doubts about how the tax provisions affect your business, you may ask the Minister of Finance for a binding tax ruling in your individual case (so-called individual written interpretation of tax law). It usually takes ca. 3.5 months to get the tax ruling. Insofar as the taxpayer complies with the ruling, he is protecting his tax position, especially considering the taxpayer will not be charged with default interest and penalties during a tax audit, and in some cases, he may even avoid having to pay understated tax amounts. 

Example: If by mistake you charge 8% VAT instead of 23% VAT on sales of your goods during the first 3 years of your business, a correction of that mistake can make your business go bankrupt. It is better to confirm with the tax authorities the right to apply the reduced VAT rate in advance. 

Tax settlements in Poland are open for tax audit for 5 years from the end of the calendar year in which the tax became due, unless the period is closed by decision of the tax authorities, usually after a tax audit.

• Example: Personal income tax for 2015 is due by April 30, 2016 so it may be subject to collection (and tax audits) until the end of 2021. 
  
• Some other aspects that are worth mentioning are: 
  
• Non-compliance with the tax regulations results in fiscal penal liability, which may concern any individual dealing in fact with the tax settlements of a taxpayer. 
  
• Late payment of any tax causes a duty to pay the interest for the delay, unless the amounts are really immaterial. 
  
• In case of a dispute with tax administration, the taxpayer can bring the tax case before the administrative courts, which are quite efficient in Poland. 
  
• Polish transfer pricing rules follow the OECD guidelines and they apply both to domestic and cross-border transactions. Hence, transactions with related parties should be determined on fair market conditions, e.g. the fees for services performed by a start-up for one of its investors should be at market level. 

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Business structure and income tax

The way in which the business is structured impacts how much tax cost will be incurred by the start-up and the investors. There are a few main factors that should be considered when choosing a legal form for the start-up (some of them are already mentioned in the legal section), in particular:

• Do we choose a legal form for operating the business which results in double taxation of income, first at the level of the start-up and then at the level of its investors? 
  
• What are the goals of the investors? How will they finance the start- up? What is their exit scenario? 
  
• Are the investors foreign tax residents? Will they be affected by Polish withholding taxes? 
  
• How will the management be remunerated? Are the managers Polish or foreign tax residents? 
  

The investors should be aware of a few features of Polish income taxation.

Companies in Poland pay 19% flat rate corporate income tax (CIT) on the generated business income and individuals may opt for 19% flat rate income taxation on most of the business income. The income is defined as an excess of tax revenues over the tax deductible costs in a tax year. Please note that some normal costs of running the business are disallowed for tax purposes, e.g. penalties, interest for late payment of tax; so they do not reduce the taxable income. 

Partnerships are not income tax payers. In practice, any income derived by a partnership is allocated to its partners and taxed at their hands so there is no double income taxation, as may be the case for a company and its shareholders. On the other hand, the partners of the partnership have to pay tax on the virtual profit of the partnership even though that profit has not yet been distributed to the partners. 

If there is income earned during the tax year, the taxpayer needs to pay monthly advances (quarterly advances can be chosen when starting a business and at the beginning of each tax year). What is more, a start-up could take advantage of a special incentive based on which it doesn’t pay income tax on income derived during its second tax year; this amount shall then be paid in equal instalments during the next  tax years. 

Where a business in the start-up phase generates a tax loss (i.e. tax costs are higher than the revenues) it may be carried forward for 5 tax years following the year in which the tax loss was incurred. However, the income amount that could be deducted in a given year by the tax loss shall not exceed 50% of the loss value, hence the shortest period to settle a given year tax loss is 2 tax years. Any change of the shareholder does not affect the right to tax loss utilisation, but tax losses are forfeit in most M&A restructuring transactions, including e.g. taking over a company with a tax loss. 

Due to the taxation rules, the most popular forms of running a business for start-ups are limited liability company (Sp. z o.o.) and limited liability partnership (Sp.k.), although a few other models exist and may be useful in practice depending on the business case. 

Investment taxation:

Type of Investment: Limited liability company (Spółka z ograniczoną odpowiedzialnością, Sp. z o.o.)

Business Risk vs. Income Tax:  Shareholders are “fenced” from the business risks of the Sp. z o.o. 

However, Sp. z o.o.  pays 19% CIT on its profit and dividend distribution to shareholders is subject to 19% Polish withholding tax (unless the shareholder is an EU company holding min. 10% shares under further conditions or a double tax treaty reduces the withholding tax rate). 

Type of Investment: Limited liability partnership (Spółka komandytowa, Sp. k.)

Business Risk vs. Income Tax: Sp.k. and general partner(s) are liable for the activities of the partnership. 

In turn Sp. k. is not income taxpayer. Its profit is allocated to the partners and taxed at their hands with 19% income tax. There should be no Polish tax on repatriation of the net profit to the foreign partners but double tax treaty should be analysed. 

When a start-up considers setting up a production plant it may be worthwhile to analyse a localization in one of 14 Polish Special Economic Zones. In order to attract new investments and create new workplaces they offer special incentives, the most important one being temporary exemption from income tax. In some zones, additional exemption from local real estate tax is also available. The minimum amount of investment to qualify for the incentives is EUR 100k. 

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Financing the business

There are a few typical ways of injecting funds into a start-up, including:

• Increase of share capital of a company/ partnership: the recipient has to pay only 0.5% stamp duty on the share capital increase. 

Example: The tax cost is usually PLN 5 on each PLN 1 000 of share capital increase. However, in the case of a limited liability company, the shares of PLN 1 000 nominal value could be taken with a share premium, i.e. the shareholder doesn’t pay PLN 1 000 but e.g. PLN 2 000 for them. In such a case the share premium is tax free, so if the company receives PLN 2 000, the amount attracting the stamp duty is only PLN 1 000. 

• Shareholder/partner loan - this method of financing is far more efficient from a tax point of view since the borrower pays interest that may reduce his taxable income. However, some limitations have to be taken into account, especially the so-called thin capitalization in the case of Sp. z o.o. From the stamp duty perspective, direct shareholder loans given to a Sp. z o.o. are tax free, whereas a loan given to a partnership attracts 0.5% stamp duty. Please note that foreign lenders can additionally suffer 20% Polish withholding tax upon receipt of interest, unless an exemption based on EU Law or a tax rate reduction based on a double tax treaty can be applied.
• Non-shareholder loan generally attracts 2% Polish stamp duty on the loan principle to be paid by the borrower, but e.g. bank loans are tax free. In the case of Sp. z o.o. one should also check the corporate links between lender and borrower since loans granted by indirect shareholders, holding indirectly 25% shares in the borrower, are treated as shareholder loans. In the case of a foreign lender, withholding tax should also be analysed. 

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VAT - tax charged on supplies of goods and services

Polish VAT is in line with the EU regulations and principally it covers any supply of goods and services in Poland. The 2015 VAT rates are as follows: 

Taxpayer is any type of business e.g. individual running own unincorporated business, limited liability company or any type of partnership. A taxpayer adds the output VAT on top of the net price of any sales (i.e. supplies of goods or services). In most cases, start-ups are exempt from VAT until they reach a turnover of PLN 150 000 per year, but it should be analysed if it makes more sense to resign from that privilege right from the very beginning, especially when a start-up needs to pay input VAT on purchases and has customers being VAT payers. If you are an exempt VAT payer you do not charge output VAT on your sales, but at the same time you cannot deduct the input VAT from your purchases; input VAT is just a cost that could be deducted against revenues for income tax purposes, which is less efficient. 

Input VAT paid upon purchases of goods / services could allow you to deduct output VAT imposed on sales in so far as the acquisitions are related to taxable sales. This means that as a rule you cannot deduct input VAT on purchases used to perform activities exempt from VAT. In addition, even though the purchase relates directly to sales attracting output VAT, some exceptions apply. 

Examples: You cannot deduct input VAT in particular from bills for hotels or restaurants and usually only 50% of input VAT on fuel for passenger cars. 

The excess of the output VAT over the input VAT shall be paid to the tax office. In case the input VAT is higher than the output VAT in a given month/quarter, the taxpayer is free to choose if he wants to:

• Roll over the excess of input VAT to the next period (s) when it could be offset against the output; or 
  
• Request the tax office for a refund of the input VAT, which usually implies a VAT audit. The VAT is refunded usually within 60 days and it may be recovered within 25 days (where all the invoices are paid by bank transfer), but if there were no sales in a given period the refund deadline is 180 days. In the latter case, the taxpayer should consider performing a VAT-able transaction before asking for a refund, to claim the refund within 60 days. 

VAT is payable monthly but you can choose a quarterly settlement - in the latter case the cash flow needs to be carefully planned to avoid a situation where the start-up has no funds to pay the tax. 

Since the Polish tax authorities have a formalistic approach during their audits, especially foreign investors starting business in Poland should give special attention to two VAT aspects: 

• Cash register (kasa rejestrująca) - usually sale of goods/services to individuals who do not run their business activities shall be registered on the cash register; there are heavy penalties for not complying with the cash register rules. 
  
• Credit notes - contrary to many EU countries, when a VAT payer issues a credit note by correcting a mistake or giving a discount, such operation shall be documented by a special correction invoice (faktura korygująca) which is quite a formalized one. In most cases, the customer should confirm that he received the correction invoice; otherwise, the correction could not allow us to adjust our VAT settlements. 

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Some other Polish taxes you have to be aware of

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Hiring employees

Progressive personal income tax (PIT) on an individual’s income is 18% on first PLN 85,528 of income and 32% on excess. Regardless of level of income, 19% flat rate may apply to most of the business income but the taxpayer has to submit a notice to the tax office within a given deadline. However, salaries of Management Board members are always subject to tax progression. 

When hiring personnel a start-up needs to consider also that:

• Social security contributions are co-financed by employer and employee; in the case of lower wages below ca. PLN 10,000 gross/month the total salary cost of the employer is 120.61% of the gross amount offered to the employee; 
  
• Health insurance contributions are fully paid by employee and mostly deductible against his personal income tax. 
  

Copying of this content is allowed only with reference to the source and indication of the author of  TQM systems material. 

Editor: Elena Teplitskaya

Composed by Adrian Branny

• 
• Editor of TQM systems Olga Nikanorova
• 6/12/2020 7:20:26 PM
• enblog