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Personal Income Tax - Major changes for 2007

Alex Staniszewski, December 2006

Personal Taxes

Residence

Residence criteria will now be based on the provisions of the model OECD tax convention. Persons resident in Poland are subject to unlimited tax obligation on their worldwide income. A resident is defined as person whose centre of personal or economic interest is in Poland or who spends more than 183 days in Poland in a tax (calendar year).

Capital gains on real estate sales

Gains will now be taxed at 19 per cent of sale proceeds less initial purchase costs.

Previously real estate sales were taxed at 10 per cent of sale proceeds, with properties held for at least 5 years exempt from taxation.

Business Taxes

Small tax payer

A small taxpayer is defined as an entity that had gross sales (net sales plus VAT) not exceeding EURO 800 000 during the previous tax year.

Such taxpayers may use accelerated tax depreciation (i.e. 100 per cent) in respect of tangible and intangible fixed asset purchases of up to EURO 50000 in a given tax year (excluding real estate and private motor cars).

It should be noted that the above provision is treated as a form of state aid (de minimis) and may affect a taxpayer's position when applying for other forms of state aid, e.g. payment of tax or social security liabilities in instalments.

Self-employment (definition)

The possibility of self-employment has been narrowed to exclude activities which if one all of the following criteria are met:

• civil liability for activities performed rests with the customer,
• activities are carried out at a time and place indicated by the customer,
• the contractor does not bear the economic risk associated with his activity.

Contracts for specific work (umowa o dzieło)

Such contracts are highly tax efficient as they qualify for a flat rate of 50 per cent tax expenses. Qualifying activities will be severely restricted from 1 January 2007, and comprise: inventions, maps, industrial and other designs, trade marks, and decorative designs.

Foreign exchange gains and losses (art. 9b and 15a)

Ability to use either accounting method (all gains or losses whether realised or unrealised) or tax method (realised gains or losses). Election needs to be made by the end of January 2007 and is effective for 3 years. Only entities subject to audit may elect to use the accounting method.

Expenses which are now tax deductible

• All advertising whether public or non-public is now a tax deductible expense. Previously non-public limited to 0.25% of turnover.
• Medical expenses (e.g. employee medical cover).

Expenses which are now no longer tax deductible

• Representation costs, namely catering services, food and beverages.

Expenses-definition

Expenses are now defined as direct or indirect. This will now assist in apportioning expenses to appropriate tax periods.

Personal motor cars-classification

The definition of a personal motor car has been tightened up to prevent or reduce the chance of classifying such a vehicle as a goods' vehicle which are subject to more favourable tax depreciation regulations.

Tax Depreciation

The general 30 per cent depreciation rate on new fixed assets (equipment) is now ended. Assets purchased by large companies will generally be subject to lower rates of depreciation. However, assets purchased prior to 31 December 2006 will remain subject to existing depreciation rates.

Quarterly tax reporting more favourable conditions

Small tax payers as defined above, may file tax declarations and pay tax instalments quarterly. The same provision applies to newly formed entities in their first year of operation.

Tax Declarations

The system of filing monthly or quarterly declarations will be scrapped from January 2007. An annual tax declaration will be filed, however taxpayers must maintain sufficient records to justify monthly or quarterly tax instalments made.

Charitable donations

Donations may now be made to EU or EEA located charities, and are deductible up to 6 per cent of taxable income.

Tax bands and allowances

These have been subject to indexation for the first time since 2001.

Tax rates and bands in force from 1 January 2007 onwards are as follows: