The 17% solution
Having overcome this initial hurdle there are several conditions to be satisfied to benefit from the special flat rate tax. These are:
" The income must be earned solely from the performance of the registered business activity.
" A business activity must be one classed by the authorities as a profession ("wolny zawód"). A specific exemption applicable to professions performed solely for the benefit of physical and not legal entities, such as a doctor, dentist, teacher, attracts the less generous flat rate of 20%.
" A taxpayer must not have performed similar activities for an employer in the year preceding the tax year or before commencing the business activity in the given tax year. This means you may not switch from an employment contract to performing a business activity for the same principal simply to benefit from the special flat rate.
" It is vital an individual's income during the preceding tax year did not exceed E250,000 - this requirement relates to individuals who carried on business activity in the year preceding that was also taxed at a flat rate. In practical terms this condition applies from year two of tite business.
Effectively an individual who registers a business activity is self-employed. To decide whether an individual qualifies for this status, it is useful to consider those factors that clearly differentiate between an employee and a self-employed individual, since it is on this basis the tax authorities may question the individual's eligibility to benefit from the preferential rate.
Checklist of status factors
The key issues are:
" Is the individual free to arrange his work schedule and complete assignment? Or is he under the control of a manager at the client company?
" Does the contract specify it is for services, refer clearly to self employment and specify the individual is responsible for his own tax and social insurance contributions?
" Does he have headed notepaper and invoices and bill the company regularly for work performed? Is the basis of remuneration an overall fee or for services provided at a rate per hour?
" Does the individual provide his own equipment and motor vehicle?
" Can he turn down work, and provide services for more than a single client? Is the client obliged to offer work?
" Can he provide a substitute to complete the job if necessary, payment of whom will be his responsibility?
" Has any financial risk been taken by the worker in becoming self-employed?
" Are any company or employee benefits provided, including paid holidays, sick pay or redundancy entitlement by the client?
" Is it clear to other employees of the client company that the individual concerned is a contract worker and therefore self-employed?
" What are the terms regarding termination of the contract? Can the supplier of services be dismissed by the client?
Practice demonstrates it is not essential to have a positive answer to all of these points to demonstrate self-employed status. In some instances self-employment may be determined where only one or more of these points are satisfied. The taxman seeks foremost clarity of both parties to the contract.
After that, plain sailing? This being Poland, not quite. Before you clap your hands at the prospect of substantially decreasing your effective tax rate in the future, you must also be satisfied your business falls within the tax law definition defined by the Tax Ordinance (ref: my last column), specifically a business activity other than one described under article 13 of the Personal Income Tax (PIT) Act.
Those activities defined in article 13 (income from which are denied relief at the 17% tax rate) are ones performed personally such as teacher, sports referee, priest and so forth, board members and members of supervisory boards or income from the provision of personal services on the basis of a service or specific task contract for legal entities and not for the general public. Where such a service is provided to a group or groups of individuals then it will qualify as a business activity eligible for the 17% flat rate.
Having your business registered requires filing a registration form with the local authority including details of your business or trade name, owner of the business nature of its activity, where it is to be performed and date of commencing activities.
Within 14 days from the date of registration you need to obtain a REGON number (business identification number). You are also required to set up a business bank account for all transactions over €3,000 in value or €1,000 where the sum of the transactions with a single customer or client exceeded €10,000 in the previous month.
You must not forget to register your business activity with the tax office and obtain an appropriate tax identification number.
Anna Szymańska is a tax senior manager in the Warsaw office of Ernst & Young.
