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Plans to implement a unified tax on income earned by natural persons

2016-11-03

Recently there have been communications of changes to the system of taxation of income earned by natural persons. The principles of levying tax and social security contributions on income applied to date are to be replaced by the so called unified tax, the amount of which will take into account income tax of natural persons and contributions for social and health insurance. According to initial communications, several rates of unified tax will be implemented, ranging from the lowest one of 19.5% to the highest one of 40%. In principle, those changes are to simplify the collection of tax and social security contributions and to reduce administrative work required from entrepreneurs in connection with settlement of public dues with many institutions. In addition, the planned reform is to introduce for less affluent taxpayers a tax-free amount higher than at the moment. Implementation of those changes is planned for 1 January 2018.

In the course of discussions about plans to implement a unified tax it was communicated that implementation of the tax will be connected with liquidation of PIT flat rate of 19%, which in the current regime may be used by entrepreneurs conducting individual business activity or partners in a partnership (among others, a limited partnership very popular among entrepreneurs).

It must be noted that the flat rate of 19% is profitable for entrepreneurs/partners whose annual  income exceeds ca. PLN 100,000. In addition, such entrepreneurs pay lump sum contributions for social and health insurance, the amount of which depends on the current level of average remuneration (currently in 2016, the total lump sum contributions for social and health insurance of an entrepreneurs are PLN 1,121.52). This way of income determination causes that the total charge levied on income of an entrepreneur using the flat rate of 19% and paying lump sum social security contributions goes down as his/her income goes up. As communicated, planned changes and implementation of a unified tax are aimed at eliminating this phenomenon and leading to a situation where the charge levied on income of an entrepreneur in connection with income tax and social security contributions goes up along with the income going up (similarly as in the case of employees).

At the moment, no proposal of the Act on implementation of a unified tax has been yet published, however, the announced changes have raised large concerns among entrepreneurs, for whom implementation of a progressive unified tax instead of a flat rate of 19% and lump sum social security contributions may be connected with a significant increase in tax charges.

The changes may be implemented at the earliest as of 1 January 2018. In the nearest time assumptions for tax reform implementing a unified tax should be published. We will inform you on an ongoing basis in our monthly Newsletter about details of planned changes and their possible impact on the activities of entrepreneurs.