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Tax Incentives for Software Developers in Poland

January 13, 2024

Poland is changing its tax laws!

At the beginning of 2022, the Polish government initiated a large-scale tax reform named the Polish Deal. The aim of the amendment was primarily to increase the tax burden on the middle and upper classes, but a number of notable tax incentives for software developers (including other IT workers) were also introduced.

The Polish Deal touched on several areas of taxation, bringing significant changes to the Corporate Income Tax (CIT), Personal Income Tax (PIT), and Value Added Tax (VAT).

However, as with other major fiscal reforms, these changes came with new challenges.

The effectiveness of the new amendments has been questioned as the first days of applying new tax regulations revealed a number of serious problems related to their application in practice for Poland. Therefore, several modifications were made to the Polish Deal 1.0 to address the ongoing concerns regarding the increased tax burden and its effectiveness.

In this article, we’re going to talk about these latest tax amendments and their impact on local businesses and employees with valuable insights on how the Polish Deal 2.0, which came into effect on July 1, 2022, addressed some of the concerns regarding tax settlements and salary calculations for employees in IT sector.

How Poland tax incentives work in practise

Typically, Polish IT firms have many software developers and other employees in specialist fields who are self-employed or work based on B2B contracts under which a developer is considered a person who runs their own business.

With the latest amendments to the Polish Deal, a major change was introduced concerning workers of this kind. Now they can pay tax at a flat rate of 12% of their revenue. It’s important to mention that this tax is paid on revenue, not income, meaning that the expenses an individual in question incurs are non-tax-deductible. This tax payment option is beneficial to those who own a business that doesn’t generate extra costs.

The alternative to this payment model is the taxation of business income at a linear rate of 19%, which is advantageous for people whose businesses incur high expenses (due to the tax-deductibility nature of those expenses).

The form of taxation chosen will also depend on the rate of health insurance contributions, which were changed at the beginning of 2022 and differ between these two forms of taxation.

The Polish Deal 2.0

The Polish Deal, introduced on January 1, 2022, has caused “wage inflation,” where most employers were forced to increase salaries by around 10% to mitigate tax changes and rising inflation. However, the salary changes would depend on the positions and value of the original (pre-polish deal) salary, covering only a small group of employees.

With the increased fiscal burden on the entrepreneurs, they had to bear enormous pressure from employees to compensate for inflation as well as losses due to the “Polish Deal” for the employees with higher salaries. This created chaos among the companies trying to survive in the fierce competition for talent, making it harder for them to attract and retain scarce tech talent.

Due to the difficulties with the execution of the Polish Deal implemented on January 1, 2022, several additions have been made to address the ongoing concerns regarding tax settlements and threats to the employment structures of companies.

Some of the tax changes (valid from July 1, 2022) particularly relevant for IT sector workers include:

1. Removal of the middle-class tax relief

Due to the practical difficulties of the middle-class tax relief, which was introduced for those who run their own business and have employment contracts, the Ministry of Finance decided to remove this option altogether.

It was done with the assumption that the lack of this relief would be compensated with a decrease in PIT to 12%.

At the end of the tax year, the tax office will check which remuneration calculation rules, the Polish Deal 1.0 or the Polish Deal 2.0, will be more favorable for a taxpayer and apply those rules accordingly. A taxpayer will be granted a refund from the tax office in case if the rules of the Polish Deal 1.0 are more favorable.

2. Change in the form of taxation for entrepreneurs

In Poland, entrepreneurs subject to a flat 19% PIT rate or lump sum taxation can now change their form of taxation to a tax scale. In other words, switching to a tax scale would mean that they’re obliged to pay 12% for income up to PLN 120,000 annually with 32% for annual income above that threshold.

It’s possible to switch to another form of taxation after the end of the tax year by selecting an option in the annual tax settlement and applying the general taxation rules for the entire 2022.

3. Potential deduction of health insurance contributions

A possibility of the partial deduction of health insurance contributions was introduced in the Polish Deal 2.0, depending on the form of taxation:

– Flat tax rate of 19% -> income deduction up to PLN 8, 700;

– Lump sum -> reduction of revenue with 50% of the health insurance contributions paid.

Compared with 2021, when health contributions were fully deductible from tax (not from income/revenue), this is a far less beneficial change. Moreover, this amendment doesn’t apply to taxpayers subject to a progressive tax scale as their health contributions aren’t tax deductible at all.

For more updated information related to the latest amendments in the Polish Deal, please check out the article here.

Considering the importance of the IT industry, continuous government support is essential

With the rapid pace of technological development, the government plays a crucial role in fueling the growth of the IT industry in Poland as it has a direct impact on the sector, and, with the right tax incentives in place, can boost the industry growth even further.

Despite the challenges that come along with the government-introduced initiatives, it’s vital for the government to continue to support this industry by making necessary amendments to address the concerns surrounding the Polish Deal 2.0.

However, industry growth doesn’t come with tax incentives alone; the tech talent is key to building a resistant, goal-oriented team that will then boost the company’s growth potential. For the industry to thrive, the scarce tech talent needs to be matched to the right companies.

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By creating a developer profile on the TalentGrid platform, you’ll have the opportunity to get matched to global roles, and find the workplace of your dreams!

References: TKP, Infor, Grant Thornton, Monika Salawa, pwc, Poland Weekly, ASB

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