Personal income tax

Personal income tax is the basic means of taxing the income of two fundamental groups of taxpayers in Poland.

Individuals who are employed on the basis of an employment contract, and individuals who are solo proprietors. Personal income tax for these groups is calculated at three different rates; 18%, 19%, and 32%.

Taxpayers who are employed on the basis of a employment contract pay taxes according to a progressive rate; 18% for income up to 85,528 PLN, or 14,838 PLN in tax, plus 32% on income above this threshold. Advances on estimated personal income tax are subtracted from employees’ pay and paid to the inland revenue by employers, who in this case act as the payees of the tax. Taxpayers who run their own businesses may choose the form of their taxation, paying either a progressive rate as above, or a flat tax of 19%.

Personal income tax is also applied to partnerships of various types. In the case of general partnerships [spółka jawna], partnerships [spółka partnerska], limited partnerships [spółka komandytowa], and limited partnerships with shares [spółka komandytowo-akcyjna], the taxpayer is not the company, but rather its shareholders and it is they who must submit tax returns. Income resulting from participation in partnerships is treated as income from proprietorship. This is because a partner is considered to be an individual carrying out business activities and on this ground is subjected to income tax. This situation does not occur in the case of companies with share capital.

Favorable aspect of the above arrangement for the taxpayer is the fact that when a taxpayer is a partner in several partnerships, income received from each of these partnerships comprise income from business activities. This means that for the purposes of establishing the basis for taxation, it is necessary to sum up the income from individual partnerships. If some of the partnerships in which the taxpayer is a partner have recorded losses, then the total taxable income is reduced by the amount of these loss, and the taxpayer only pays tax on real income accrued from all of these operations.

In order for tax authorities to accept that losses have been incurred on business activity, it is necessary to establish that the sum of the taxpayer’s incomes from all sources is less than the sum of losses in a given fiscal year. A loss of this type may be deducted against future earnings within five years of its occurrence, bearing in mind two conditions; first, that the loss may only lower taxable income arising from the same source, in this case from the business activity, and second that the amount by which taxable income is reduced may not exceed 50% of the losses in any fiscal year.

This regulation is in some ways similar to the taxation of tax capital groups which are regulated by the Act on Taxation of Legal Persons, with the difference that it is considerably more flexible and does not require the taxpayer to fulfil complicated formal conditions.

An issue which often results in disputes between taxpayers and inland revenue is the personal income tax base. This base comprises income, defined as the difference between revenues and the cost of acquiring those revenues. Tax authorities often question the relation of the cost to the acquisition of revenue, necessary in order to qualify a given cost as a cost of acquiring this revenue, thus deductible for the purpose income calculation. According to the legal definition (Article 22 of the Act on Personal Income Tax), costs incurred in order to achieve revenue, to maintain or secure sources of revenue may be considered costs of acquiring revenue.