Polish Deal 2.0 adopted - key changes in the personal income tax and social security regulations

Polish Deal 2.0 – what will change in personal income tax and social insurance premiums?

Below we present key changes in the personal income tax (PIT) and social insurance premiums (ZUS).

The Act reduces the tax rate applicable in the first PIT bracket (applicable annual to income lower than PLN 120,000) from 17% to 12%. This change will work retroactively, i.e. the new PIT rate is applicable as of 1 January 2022.

• The annual tax-free amount introduced from 1 January 2022 remains unchanged (PLN 30,000 per year for taxpayers earning income taxed under general rules, i.e. according to the scale). However, due to the change in the tax rates, a new tax-exempt amount was determined, i.e. PLN 3,600 per year (30,000 PLN x 12% = 3,600 PLN), and PLN 300 per month (1/12 of the annual tax-exempt amount).

• A taxpayer will be entitled to authorize up to three remitters (including parties to a contract of mandate) to deduct the monthly tax-exempt amount, indicating the specific amounts to be deducted: 1/12 (PLN 300 per contract), 1/24 (PLN 150 per contract) or 1/36 (PLN 100 per contract).

• Further, the Act allows individuals to deduct the tax-exempt amount when calculating monthly PIT advances regarding income from activities carried out personally, such as a contract of mandate, for specific work, income from property rights, and to those who report their income on behalf of actual remitters (e.g. based on a foreign employment contract).

• Since the PIT rate has been reduced to 12%, tax remitters will no longer be required to double-count, compare and reconcile PIT advances in 2022 (in accordance with the rules applicable in 2022 vs. 2021). The mechanism of “comparing” tax advances is eliminated and replaced with a single tax advance calculation system.

• Tax remitters will be exempt from the obligation to withhold monthly PIT advances following taxpayer’s request if their expected annual income taxable under general rules does not exceed PLN 30,000.

• Importantly, all statements and request regarding PIT advance calculation, submitted to tax remitters must be in writing. Tax remitters are not liable for underestimation of the tax base as a result of relying on taxpayer’s statements.

• As of 1 July 2022, the “middle class relief”, which had been in force since 1 January 2022, has been eliminated. The amendment applies to the entire year, which means that when filing their annual tax returns, taxpayers should calculate tax using the new rates instead of calculating the relief, which was regarded as excessively complicated and thus replaced with the reduced tax rate.
  
• As the decision to retroactively eliminate the middle-class relief has caused certain constitutional doubts, the Act provides for a mechanism to determine “hypothetical 2022 tax amount”, i.e. the one calculated in line with the rules applicable in the first half of the year (based on then-valid tax rates and including the middle-class relief). The hypothetical amount shall be calculated by tax authorities, and if it is lower than the tax liability under the amended law (i.e. applying the 12% rate and no middle-class relief), the difference shall be refunded to taxpayers formerly entitled to the middle - class relief (i.e. employees and self-employed who generate annual income ranging from PLN 68,412 to PLN 133,692) to avoid deterioration of their tax position.

The Act contains provisions enabling self-employed persons who have so far paid a 19% flat tax or a lump sum tax regime, to switch to the tax brackets (these are special provisions limited to reconciliations for 2022 following the change of regulations during the year):

• Those using the 19% flat rate will be able to change the taxation of their 2022 income after the year-end, submitting annual tax returns on the PI-36 form (instead of PIT-36L).
• Taxpayers under the lump sum tax regime have two options to switch to the tax brackets:
  • After fiscal year-end, upon submitting tax returns for 2022 on the PIT-36 form (under this option, progressive taxation will be effective in relation to the total income earned in 2022);
  • During the year, upon submitting a statement that they resign from the lump-sum taxation of their revenue generated from 1 July 2022 to 31 December 2022. To be effective, the statement must be filed by 22 August 2022. Those who opt for this solution will be required to file double annual tax returns: PIT-28 form for the income generated by 30 June 2022 and PIT-36 to reconcile income generated after 1 July 2022. The adopted change in taxation shall remain in force in subsequent years unless another taxation form is selected.
    

Those who generate income from private rental activity are also provided with an option to change the lump sum tax regime applicable for rental income in 2022 (in case they have chosen the lump sum tax regime as appliable for rental income in 2022). After the fiscal year-end, such individuals will be able to reconcile their rental income generated in 2022 applying the tax brackets and using PIT-36 form instead of PIT-28.

Self-employed persons taxed with the 19% flat rate, lump-sum or fixed amount can deduct healthcare insurance contributions paid during the year (both for the self-employed himself and its counterparties). The contributions shall be deducted from income, not from the tax amount as in the prior year, though. The deduction principles differ depending on the taxation regime:

• Sole proprietors applying the 19% flat rate can deduct up to PLN 8,700 in 2022;
• Sole proprietors taxed under the lump-sum regime can deduct 50% of the total contribution amount paid;
• Sole proprietors paying a fixed tax amount can deduct 19% of the total contribution amount paid.
  

• For lump-sum taxpayers, the deadline to submit tax returns has been postponed to 30 April of the subsequent year to be unified with those applicable under other regimes. The new deadline is applicable to annual tax returns for 2022.

• The deadline to pay the lump-sum tax for the last month/quarter of the fiscal year has been moved backward, to 20 January. This change, though, shall first time apply to the lump sum tax payment for December/last quarter of 2023.

We have selected some other changes that require special attention:

• Health insurance payment rules regarding individuals remunerated solely based on their appointment (including proxy) have been clarified; they are explicitly subject to the health insurance obligation. Importantly, the explanatory memorandum to the draft indicates the change has been introduced as of 1 January 2022 and the purpose of the recent amendment is just to clarify it.
• The obligation to pay social and health insurance premiums has been extended to general partners in partnerships limited by shares (spółka komandytowo – akcyjna). The change shall come into effect in January 2023.
• Single parents are again permitted to file tax returns jointly with children, similarly as before 2022 (instead of applying a tax relief of PLN 1,500). Tax remitters will be able to calculate monthly PIT advances of single parents on preferential terms (the same as applying the married filing jointly rule).
• The threshold value of annual income earned by an adult child that continues education qualifying single parents to preferential tax treatment, 4+ families to tax exemption and to childcare tax relief has been increased from PLN 3,089 to 12 x disability pension, i.e. currently to PLN 16,061.28.
• Income of minor children has been included in the list of items not to be added to parents’ income. It will be taxed using tax brackets and including the tax-free amount of PLN 30.000.
• Annual maternity allowance shall be treated as a type of income that could be tax-exempt up to PLN 85,528 along with tax exemption available for qualifying persons, i.e. certain individuals who become Polish tax residents; people aged under 26; 4+ families; individuals who reach the retirement age but continue to work.
• Tax relief related to the purchase of historical buildings has been modified; the purchase costs are not tax-deductible anymore, but costs of renovation, maintenance or construction carried out in historical buildings entered in the cultural heritage register are tax-deductible upon completion confirmed by a certificate issued by a conservator. The amendment comes into effect in 2023, with the current rules remaining in force until 31 December 2022.
• Terms of preferential tax treatment regarding sales of shares acquired during IPO have changed: if a loss is incurred on such a sale, it can be reconciled. This is an exception from the principle of not reconciling losses related to revenue exempt from taxation.
• Tax allowance transferable to NGO’s qualifying as public benefit organizations has been increased to 1.5%.