All she wanted to do was teach a few lessons …

Before I dive into this week's column, you might be interested to hear that during the summer break President Aleksander Kwaśniewski signed into law the changes to the Personal and Corporate Income Tax Law. While I'm not about to launch into yet another rendition of what those exciting changes are, I'll pick a few relevant ones in future columns to discuss in detail. To kick off the post-summer season, though, I thought I'd share a catch-22 story with you. Although the story is based on real-life events, the names and locations have been changed to protect the innocent. Picture the scene: Martha, the demure, stay-at-home wife of Chuck, who has been assigned to work in Poland as the chief executive officer of a large multinational, decided that to while away the hours and to help out a few of her friends, she would offer to teach their children a foreign language. Martha is and always has been a lawful citizen, so the first thing she did was find out what administrative, tax and social insurance formalities she was required to abide by to teach.

Enter the dragon Martha, wishing to provide services to other individuals, discovered that what she had to do was to register an economic activity (działalność gospodarcza). Having done this, she could have contracted with each child's parent, provided a service, received a fee and, on the basis of keeping a book of revenues and costs, could have filed appropriate tax declarations and paid taxes to her local tax office. Better yet, once registered with a działalność gospodarcza, there would be no need for Martha to obtain a work permit to provide the language training services here in Poland. If life were only that simple. Unfortunately, because Martha is American and does not qualify as a citizen of a European Union state, and since she was unable to locate an international agreement between the U.S. and Poland, confirming the principal of reciprocity in relation to personal economic activities, she was turned away at City Hall and advised that she could not register such an activity, unless of course she decided to become a permanent resident of Poland, with all the consequences that that entails. Surely there must be alternatives. Indeed there are, and if you are not averse to some interesting practical issues, some of these can be quite fun. In general, Martha can't provide a personal service (umowa zlecenia) to individuals without it being an economic activity. We already know that she can't register an economic activity, so we breathe a sigh of relief that the nature of the service that Martha wishes to provide is educational in nature (yup, these fall under special alternative provisions when provided by an individual). Just to make life amusing, though, Martha will still likely have to enter into a personal service agreement, which is where the real fun begins.

Passing the buck Either she can contract with each interested party separately, or, if the interested parents can be persuaded, she can enter into a single contract with a Parents' Committee. So far so good, but what are the practical implications of these two scenarios? If Martha contracts with each interested party on an individual basis, she will be responsible for her own taxes (not a problem). But with this option the trouble begins when we consider the social insurance consequences. Since in Martha's case all the contracts are likely to be started fairly close together, and most are expected to last for more than just a few months, it will be the first of the contracts that will be subject to social insurance, while the subsequent contracts will be exempt. Although she will only have to register once with the Social Insurance Administration (ZUS) for the purpose of paying her statutory contributions, the income is still subject to a contribution to statutory health insurance, so she will need to ensure that each respective parent registers each contract so that they (the parents) can have the pleasure of paying a contribution in the region of a few złotys. (7.75% of the cost of a language lesson is not very much.) In addition, Martha will be required to obtain a separate work permit for, you've guessed it, each separate contract. You'll appreciate that at this point Martha is losing a little of her initial enthusiasm. The better, although still not ideal, option is to persuade the parents to set up a committee, ideally with a treasurer and a bank account. The said committee could then, under a single contract, ask Martha to provide language-teaching services to a group of children. This is much better - now we have only one work permit required instead of the several required in the previous option. However, we have now placed the burden of Martha's tax and ZUS obligations on the parents' committee. Being a parent myself, I would not be the first in line to volunteer for that duty. Also, Martha's entire income is now subjected to ZUS rather than the substantially smaller amount under a contract with a single individual. In short, unless Martha can persuade a legal entity, a language school for example, to contract her services, the likelihood is that the administrative and bureaucratic hurdles (not to mention the costs) will result in her having to give up the idea of teaching. The sad thing here is not just that Martha has been effectively stopped from providing a service to the community, but also the kids who were looking forward to learning a new language (or do I mean their parents?) will now be more than a little disappointed.

Anna Szymańska is a tax senior manager in the Warsaw office of Ernst & Young.