Tax optimization – Polish GmbH
Tax optimization in Poland is a term not defined in any tax law. However, it can be understood in various ways. Generally, it encompasses measures to reduce the tax burden on taxpayers.
It is important to understand that proper tax optimization in Poland requires more than just an analysis of tax regulations. To reduce the tax burden, it's also crucial to consider the company's future prospects. This involves forecasting future revenues and expenses. It's also worthwhile to consider potential events that could significantly impact business operations.
Tax optimization measures can be divided into two types. The first includes measures carried out in accordance with the content and purpose of the regulations. The second consists of avoiding or evading taxes.
Tax avoidance can be considered a legal act that contradicts the objectives of the regulations. It is based on exploiting loopholes or ambiguities in the regulations. Such measures can be challenged by the tax authorities, and the benefits obtained by the taxpayer can be revoked.
Tax evasion, on the other hand, consists of taxpayers acting contrary to regulations. This includes, for example:
- Failure to declare income,
- Excessive costs,
- Intentional non-payment of taxes,
- Providing false information.
Legal tax optimization can be very beneficial for a Polish limited liability company (LLC). However, it's important to note that the line between legal tax optimization and illegal tax avoidance or evasion is sometimes thin. Therefore, every decision made by taxpayers in this area should be carefully analyzed.
Tax optimization methods for a Polish limited liability company (GmbH). How can income tax be reduced legally?
Services for the company and recurring non-cash contributions from the shareholders
One way to reduce taxes (including corporate income tax) is for shareholders to provide services to the Polish company. In a Polish limited liability company (LLC), shareholders can primarily provide services within the scope of their own business activities. It is also possible to introduce recurring non-cash payments.
Recurring non-cash payments are listed in Article 176 of the Polish Commercial Code (pol. KRS). Shareholders of a limited liability company (LLC) can only provide these payments based on the articles of association. The articles of association must precisely and specifically define the activities to be performed by the shareholders. The remuneration should be set at market rates. The LLC should pay these payments to the shareholders even if it does not generate a profit.
The provision of services under Article 176 of the Belgian Code of Civil Procedure (KRS) must be repeatable. From the perspective of the company and its shareholders, it is important that the service is not continuous. A continuous service exists when there are no clear breaks between the activities performed. Continuous service provision means that its beginning or end cannot be separated. Examples of such continuous services include customer support, consulting, or rentals.
Reimbursement for recurring non-cash payments is a business expense for the Polish limited liability company. This means that the company can reduce its corporate income tax liability as a result.
On the shareholder's side, this remuneration is taxed according to the income tax scale. Up to an income of PLN 120,000 in the tax year, the shareholder pays only 12% income tax. In addition, they can take advantage of the tax-free allowance of PLN 30,000. At the same time, this remuneration is not subject to social security or health insurance contributions. However, it is important that the services rendered are indeed recurring and not continuous. Otherwise, the Polish Social Insurance Institution (ZUS) may require the payment of contributions as if it were a contract for work and services.
Another method of tax optimization can be the leasing of the shareholder's private assets to the Polish limited liability company (GmbH). This does not require the shareholder to be involved in any business activity. The leasing can be structured as a so-called private lease. As with other services, it is important that the rent is set at market rates.
By providing the aforementioned services, it is possible to tax a portion of the Polish limited liability company's profits in a virtually one-time manner. On the one hand, the compensation for these services is taxed at the shareholder level; on the other hand, it constitutes a business expense. This is more advantageous than distributing dividends from the company. In the latter case, the tax is levied first at the company level and then at the shareholder level. Furthermore, the distributed dividend does not represent a business expense and therefore does not reduce the tax burden.
The introduction and application of the above-mentioned solutions should always be accompanied by an analysis from a tax advisor who can assess the risk that these measures will be challenged by the tax authorities.
Remuneration of the managing directors
Another way to legally reduce the tax burden of a Polish limited liability company (GmbH) is to grant the managing directors remuneration. This can be based on:
- an employment contract
- a civil law contract (contract, management contract),
- an appeal.
Regardless of the basis, the remuneration is considered a tax expense for the company. However, on the shareholder's side, the remuneration is always taxed according to the income tax table. Thus, the managing director's income up to PLN 120,000 per year is taxed at a rate of 12% income tax. The managing director can also take advantage of the tax-free allowance of PLN 30,000. However, it should be noted that this income is subject to the same tax rate as other income taxed according to the table.
The differences between the aforementioned forms arise, however, with regard to social security contributions. Concluding an employment contract or a contract for services with a managing director requires the payment of contributions according to the general rules (social security and health insurance contributions). Performing management functions on the basis of an appointment is more advantageous. In this case, no entitlement to social security arises. There is only a mandatory health insurance contribution amounting to 9% of the remuneration. The health insurance contribution is waived only if the managing director does not earn any income as a result of this appointment.
Paying remuneration to the managing directors (who are also shareholders) is also more advantageous than a dividend.
Research and development allowance
Research and development activities focus on creative work that includes scientific research and development. The result of these activities can be the creation of new products, services, or technologies, or the improvement of existing ones.
It is important that this activity be innovative and novel. Furthermore, it should exhibit a certain systematic approach. The first area of research and development activities is scientific research. This is divided into basic research and applied research.
Basic research aims to gain knowledge about the fundamentals of phenomena and facts. However, it is not geared towards direct commercial application. Applied research, on the other hand, aims to develop new products, processes, or services. It also includes the introduction of significant improvements to existing solutions.
The second area of research and development activities encompasses development. This is an activity that aims to:
- to plan the production
- To design and create improved or new products, processes, or services.
The research and development allowance allows for double or even triple deductibility of expenses related to this activity. These expenses are referred to as qualifying costs. Companies benefiting from the allowance first record the costs according to the general rules. The qualifying costs can then be deducted again from income.
For salaries, the deduction can be doubled. This means that, in the best-case scenario, the tax benefit can amount to up to 38% of such expenses.
Estonian Corporate Tax (CIT estoński)
Estonian corporate income tax is an alternative form of corporate taxation. It allows for the deferral of taxation until profits are distributed to shareholders. Furthermore, the effective taxation of income tax (PIT) and corporate income tax (CIT) upon profit distribution is lower than under traditional corporate income tax.
Estonian corporate tax can be particularly advantageous for a limited liability company (LLC), whose profits are always taxed twice. However, it is important to be aware of certain conditions that must be met to take advantage of this tax benefit. Polish LLCs, in particular, must pay attention to the following points:
- to plan the production
- Employment level (generally at least 3 full-time positions),
- Income structure (passive income may make up less than 50% of total income),
- Capital structure (they may not hold shares in other companies and may not have shareholders other than natural persons).
Estonian corporate tax is particularly advantageous for companies that want to reinvest their profits. As long as these profits are not distributed to shareholders, practically no tax is levied. However, this does not mean that this tax system is not advantageous for companies that distribute the majority of their profits to shareholders. In any case, the lower tax rates result in an advantage.
Does a Polish limited liability company (GmbH) have a tax-free allowance?
The tax-free allowance refers to the income earned in a tax year on which no tax is payable. However, this only applies to individuals. Limited liability companies (GmbHs), like other corporations subject to income tax, are taxed from the very first euro earned.
However, this does not mean that the tax allowance cannot be used within the business activities of a Polish limited liability company (GmbH). For example, managing directors or shareholders of a Polish GmbH who earn income from performing their duties or from providing services can benefit from this allowance. The crucial factor is that this income is taxed at the progressive tax rate. In these cases, the tax allowance amounts to up to €3,600 per tax year.
Can a Polish limited liability company (GmbH) be considered a small business?
The standard corporate income tax rate in Poland is 19%. However, under certain conditions, Polish limited liability companies (LLCs) can apply to a reduced rate of 9%. This reduced rate can only be applied to income that is not derived from capital gains.
Corporate taxpayers commencing business operations or those with small business status can pay corporate income tax at a rate of 9%. Additionally, these companies' net annual revenue must not exceed €2,000,000. This amount is converted into zlotys based on the average exchange rate published by the National Bank of Poland (NBP) on the first working day of the tax year. It is important to include all income, including capital gains and tax-exempt income.
A small business is a company whose gross sales revenue in the previous year did not exceed €2,000,000. This amount must be converted into zloty based on the NBP exchange rate on the first working day of October of the previous year.
However, the reduced rate cannot be applied to taxpayers formed through conversion, merger, or division. The only exception is the conversion of one corporate taxpayer into another. Restrictions also apply to certain companies to which tangible assets have been contributed. For these companies, the 9% corporate tax rate can only be applied from the third tax year onwards.
Small business status entitles a company to utilize further tax optimization strategies. In addition to the aforementioned 9% corporate tax rate, a Polish limited liability company (LLC) can benefit from, among other things, the following advantages:
- A lower tax rate for Estonian corporate income tax (10% instead of 20%),
- Option for quarterly advance payment,
- Option for one-time depreciation,
- Exemption from minimum tax liability.
Legal tax optimization through the application of the 9% corporate tax rate affects the overall tax burden on distributed profits of a Polish limited liability company (GmbH). For small businesses, the effective dividend tax rate is approximately 26%, while for others it is approximately 34%.
For questions regarding tax optimization for Polish limited liability companies (GmbH), please contact us by email at kontakt@kancelaria-pozniak.pl or by phone at +48 665 246 969 .