I see from the website stats and some of the feedback I have been getting that my last article on opening a business in Poland was well received so I figured I would blog about the related task which also needs some consideration – namely which tax scheme to use.
This blog post is loosely based on the polish article at moneta.pl and also my understanding of the Polish tax system, so don’t sue me if this post contains mistakes – please treat this post as a guide and check with a qualified accountant for proper advice. I also used podatki.pl, pit.pl and egospodarka.pl and a meeting with my own accountant as resources.
Polish Tax Year
This is nice and simple – in Poland the tax year runs from January to December. Why don’t we do that in the UK? (For those non-Brits wondering what I am talking about in the UK the tax year runs from April to April).
Tax Schemes
There are 4 different ways to account for your tax if you are a private individual or self employed:
- General rules (zasady ogólny). Here you keep a ledger of your income and expenditure and you pay either 0, 19, 30 or 40% tax depending on your final profit. You can offset expenses against your tax bill and also use your spouse’s tax allowance to reduce your tax bill.
- Flat-rate tax (podatek liniowy). As you might guess you pay a flat rate tax of 19% which could be good if you are going to be in the 40% tax bracket. The catch is that you can’t get tax breaks for a number of things such as tax losses from previous years, social insurance payments or health insurance payments. Also you can’t share your tax allowance with your spouse.
- Tax card (karta podatkowa). Here the amount of tax due depends on certain factors such as the type of activity you are doing, number of employees you have, number of residents in your business’s neighbourhood and so on. The virtue of this form is there is no requirement to keep a ledger or file accounts each year. But only certain types of company are allowed to use the tax card system such as light industrial companies like small transport firms, building companies or catering companies.
- Outright scheme (ryczałt od przychodów ewidencjonowanych). To be honest I am not sure if ‘outright’ is a meaningful name for this scheme but a quick look on dict.pl for ryczałt didn’t give me any better ideas so I shall refer to it only in Polish as ‘ryczałt’. This scheme allows you to pay a lower rate of tax if your company is involved with certain specified activities. For example if your company is involved with computer software then you pay a flat rate of 17% tax instead of 19%, 30% or 40%. On the plus side the tax rates can be very low but on the flip side you lose the ability to use certain tax relief schemes such as deducting expenses or off-setting your tax allowance with a spouse. Therefore it is best suited to businesses with (very) low expenses or those who want to trade for a short limited time. The tax rates for company activites are given below. Note that you can’t do this scheme if your pre-tax income will be more than 150,000 Euros in 2008.
For completeness I should mention that as of 2007 there is a 5th way called podatek tonażowy but that is only for people involved with international shipping so I won’t write about it.
‘Outright’ scheme (ryczałt) tax rates
- 20% for people who are classified as having a ‘wolny zawód’ [free profession] such as painters, actors, singers, translators, architects, lawyers etc..
- 17% for those involved with a number of activities such as hotels, guest houses, carparks, car mechanics, vechicle rental, computer hardware/software
- 8.5% for those involved with a number of activities such as working with pre-school children, sale of alcoholic drinks, botanical/zoological/environmental protection type stuff
- 5.5% for those involved with building works or transport with loads above 2 tonnes
- 3% for those involved with gastronomical activities (except alcohol)
Offsetting tax with your spouse – shared tax returns for married people
If one partner earns more than the other partner, for example if one of you stays at home or works part-time then it can be beneficial to be taxed together. There are catches to this such as:
- the marriage must be longer than the tax year in question
- the marriage must be based on mutual assets for tax purposes
- if you are late with your tax return you can lose the right to do shared tax returns
- you can’t do shared tax returns if you are using the flat-rate tax scheme or the ryczałt tax scheme
When do I have to pay tax?
For all schemes except for the ‘tax card’ system you have to account monthly and pay by the 20th of the following month. You need to also do a tax return once the year ends. If you are doing ‘general rules’ then that means in January 2009 you go and get a PIT-36 form and do a return for the 2008 tax year.
When do I choose a scheme?
You have until one day before your company starts trading to give a written declaration to the Polish tax office (Urząd Skarbowy). If you are already trading then you can change only change it at the start of a tax year – up until the 20th of January. By default your company is on ‘general rules’ unless you change it. So if you start your company like I did in October it is not necessarily a catastraphe if you decide your tax scheme is costing you more than you thought because you are only stuck with your current tax scheme until the end of the year. But on the other hand if you start your company early in the year and make a mistake with this you are stuck until January!
Which tax scheme should I use?
For most people the choice boils down to – should I do general rules or should I opt for ryczałt or the flat-rate scheme?
Ryczałt is very popular for small companies. If you are doing an activity that qualifies for a low tax rate then it can be attractive. The accounts are simpler to run than for ‘general rules’. But you must consider that you can’t deduct expenses from your tax bill which can have a big effect. Even if you don’t expect many expenses remember that in Poland you can still get away with claiming your car, mobile phone, internet connection etc.. without much hassle (unlike in the UK where they want to know which percentage was private use and what was business use). There is a calculator that you can use at podatki.pl. It is only in Polish and you have to register with their website to use it, but you enter the ryczałt tax rate (stawka), enter your expeced income (spodziewane przychody) and expected expenses (spodziewane koszty) and it will tell what your tax bill would be on both general rules and ryczałt.
General rules – I am using general rules at the moment. There is the risk that I could pay more tax by not having opted for ryczałt or flat-rate scheme if my net profit for 2008 exceeds 44,490 PLN and therefore puts me in the 40% per year bracket. However I like the fact that I can offset my car as an expense and all fuel bills, insurance, servicing etc. I also can take advantage of the fact that my wife does not work and therefore use her tax allowance. Also I have a limited company in the UK and therefore if I think my Polish company is earning too much I can issue an invoice from my UK company to remove money. Therefore I can ensure that I remain below the 40% threshold this year.
Flat rate – this could be a good option if your income is going to put you into a higher tax band and either you don’t have a spouse or your spouse doesn’t have any spare tax allowance because he/she also works. It is a popular option with higher earners.
‘Gotchas’ – things to watch out for
If you make a mistake somewhere along the line it can cost you dearly. There are a couple of known issues you must be aware of:
- your PKD code(s) affects whether you can use ryczałt or not. This can catch you out if you added extra PKD codes for things you might want to do in the future. Example: my PKD code is 62.01.Z for computer software. Normally I would be able to pay 17% on the ryczałt scheme. But because I also added code 85.59.A for teaching foreign languages (because I am thinking about doing this in the future) I am no longer eligible for the 17% ryczałt scheme. Therefore consider this when you choose your PKD codes!
- Get a stamped copy of everything you give the Urząd Skarbowy! This is a GOLDEN RULE. My accountant currently has a case where a woman gave a form to the Urząd Skarbowy to say she wanted to pay ryczałt back in January this year. She didn’t get a copy. She has paid the reduced ryczałt rate all year so far. The Urząd Skarbowy now say they have no record of her form and therefore is on ‘general rules’. The tax difference in her case runs into thousands of zloty. Apparently the Urząd Skarbowy lose forms all the time. Therefore it is critical that everything you submit you do in duplicate AND you get your duplicate copy stamped with their rubber stamp to prove it. In fact my accountant is quite paranoid on this and asks for everything in triplicate so he has a copy too.
Polish tax terminology
Income – przychód
Expenditure – rozchód
Turnover – obrót
Costs – koszty
Earnings – dochód
Odliczenia – reductions (such as social insurance and health insurance payments)
Basic taxable earnings – podstawa opodatkowania
Income minus costs = earnings
earnings minus reductions = basic taxable earnings