Sole proprietorships and LLCs in Poland: taxation and reporting rules

Poland is known for its active workforce and entrepreneurial opportunities for foreigners. “Jednoosobowa działalność gospodarcza” (JDG), or Sole Proprietorship, is a form of Individual Entrepreneurship in Poland, and it became available to Ukrainians starting from February 2022. This article will cover the key aspects of taxation and reporting for Sole Proprietors in Poland.

Reporting and Tax Obligations in Poland

According to Article 45 of the Polish Personal Income Tax Act (PIT), tax residents of Poland must submit a tax return for income received during the tax year. The filing period is from February 15th to April 30th of the year following the tax year. Tax returns submitted before the start of this period are considered filed on February 15th of the year following the tax year.

If it’s income from employment, the tax rate is 12% for income up to 120,000 Polish zlotys and 32% for income exceeding this amount. The tax-free threshold is 30,000 Polish zlotys.

The sole proprietor must choose one of the tax forms if it’s income from business activity.

General tax regime (12% or 32%):

1. Taxation at a flat rate (19%)
2. Ryczałt (a simplified form of taxation for software developers) – 12%

• Filing Deadline and Tax Payment

An individual who relocates to Poland in May 2023 and chooses Poland as their center of vital interests or resides in the territory of Poland for more than 183 days in a calendar year must file a declaration and pay personal income tax by April 30, 2024.

• Contributions to ZUS (Social Insurance Institution)

The amount of ZUS contributions depends on the chosen tax form.

If you are paying a flat-rate income tax (Ryczałt), the monthly medical insurance contribution is calculated based on the “base rate” of 9%.

The main principle of taxation and reporting for sole proprietors in Poland depends on your income and the chosen tax form. Complying with tax obligations and ZUS contributions is an important part of entrepreneurial activities in Poland.

Calculation of ZUS Contributions and Medical Insurance Tax in Poland

Calculation of ZUS Contributions

If your income exceeds these thresholds, contributions for the previous year are recalculated.

• Medical Insurance Tax

If you pay personal income tax on a linear scale, you also pay a premium for medical insurance at a rate of 4.9% of the base for contributions if this income is derived from entrepreneurial activity.

• Benefits for the First Six Months and Reduced Contribution Amounts (Mały ZUS)

Regarding social insurance contributions, you are allowed to receive benefits for the first six months of starting your business and reduce the contribution amount for the following 24 months (Mały ZUS). If you are not eligible for this benefit, you must pay social insurance contributions at no less than 60% of the projected average monthly salary.

• Deadlines and Minimum Bases

Contributions to ZUS (Social Insurance Institution) must be paid by the 20th of the following month. The minimum base for calculating contributions in 2023 is 4,161 Polish zlotys. Contributions for pension insurance, disability insurance, sickness insurance, and accidents are expressed as percentages and are as follows:

For accident insurance, the percentage rate varies depending on the number of insured persons and the industry in which the entrepreneur operates.

Additionally, you pay contributions to the Labor Fund and Solidarity Fund, which amount to 2.45% of the base together.

Taxation of Limited Liability Companies (LLCs) in Poland

• Corporate Tax Rates

In Poland, the general corporate tax rate (tax on enterprise income) is 19%. However, there is a reduced rate of this tax, which is 9%, applicable if a company’s (“newly” established) income from sales, including the amount of VAT payable, does not exceed the equivalent of 2 million euros in Polish zlotys (9,278,100 PLN).

• Tax Period and Filing of Declarations

The tax period is the calendar year (from January 1st to December 31st). Nevertheless, companies can choose a different fiscal year (e.g., between April 1st and March 31st). Companies typically need to file their tax declarations electronically. The annual declaration for corporate income tax must be submitted to the tax authority within three months after the end of the tax year.

• Taxation of Tax Residents and Non-Residents

Polish tax residents are subject to taxation on their worldwide income unless there is a relevant double taxation avoidance agreement between Poland and the respective country that provides for the exemption of foreign income from taxation in Poland.

Non-residents are taxed only on income earned in Poland. Double taxation avoidance agreements concluded by Poland may lead to certain income not being subject to taxation in Poland, regardless of its source.

• Minimum Income Tax

Starting in 2023, Poland introduced the Minimum Income Tax, a new tax obligation applied to taxpayers declaring low profits (≤2% of revenue). The implementation of this tax has been postponed until the end of 2023, and it will be applicable from January 1, 2024. The minimum tax rate is 10%. The tax base includes:

• 1.5% of operating income (excluding capital gains)
• Interest expenses paid to related parties (usually, interest expenses exceed 30% of the so-called tax EBITDA, a figure equal to profit before interest expenses, tax, and depreciation).
• Expenses for intangible services or royalties paid to related parties – exceeding 3 million PLN plus 5% of the tax EBITDA

The minimum tax does not apply, among others, to financial institutions, startups, organizations with a profit margin of at least 2% in any of the preceding 3 years, and taxpayers who have recorded a revenue decrease of over 30%.

• One-Time Dividend Tax

Since 2021, Poland has introduced a new optional and stand-alone corporate tax system called the “Estonian CIT.” This system applies to joint-stock companies that meet certain criteria and are payable only when income is distributed (e.g., in the form of dividends). The general tax rate on dividends is 19%, but for small taxpayers and taxpayers commencing business operations under these principles, the rate is 10% of the tax base, and for other taxpayers, it is 20% of the tax base.

• VAT Rates

The standard value-added tax (VAT) rate of 23% is applied to most goods and services in Poland. However, there are reduced VAT rates:

• 8% is applied to pharmaceutical products, passenger transport services, and goods for the Social Housing Program (up to 150 square meters)
• 5% is applied to books, magazines, unprocessed food products, and basic foodstuffs

So, in Poland, individual entrepreneurs and limited liability companies (LLCs) have different approaches to taxation and obligations. Individual entrepreneurs are subject to various tax rates based on their income, including the minimum income tax. LLCs fall under the general or reduced corporate tax rate and can apply special taxation for dividends.

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