New rules of lump-sum taxation of recorded revenue, applicable as of 2021, seem truly revolutionary. The amendments importantly extended the group of taxpayers eligible for application of the lump-sum tax of recorded revenue. Some amendments were introduced to fixed amount taxation rules.
Because of their scope, new rules of lump-sum taxation of recorded revenue, applicable as of 2021, seem truly revolutionary. Some amendments were introduced to fixed amount taxation rules. What are they and who they apply to?
The amendments importantly extended the group of taxpayers eligible for application of the lump-sum tax of recorded revenue. First of all, the revenue cap has been increased eight times. This means, that lump-sum taxation of recorded revenue can now be applied by taxpayers with annual revenue over EUR 250k, as long as they do not exceed the cap of PLN 2m, applicable as of 2021. Secondly, the new rules provide for abolition of most of the exemptions from lump-sum taxation, in particular those listed in Annex 2 to the Act, which has been repealed. Annex 2 to the Act provided a list of services, the rendering of which precluded the possibility of applying lump-sum taxation, hence, its repeal made it possible to lump-tax services related to buying and selling real estate for own account (which is now taxed at a rate of 10%) or services related to sports, entertainment and recreation (which are now taxed at a rate of 15%).
Importantly, the amendments were also made to the list of liberal professions, extending its scope with legal professions, but also including other occupations, such as psychologist, translator or accountant. Moreover, as of 2021, the list also includes activities performed for legal persons and organizational units without legal personality, or for natural persons for the purposes of non-agricultural business activities conducted by them. Up to now, liberal professionals rendering services to such entities were not entitled to use lump-sum taxation.
In order to make lump-sum taxation more appealing to taxpayers, some rates were decreased and the revenue limit entitling for quarterly flat-rate payments increased eight-fold. The decreased rates may be applied by taxpayers performing liberal professions (17% instead of 20%) and taxpayers rendering services in such areas as photography or parking lot management (15% instead of 17%). Furthermore, the amendments lowered the amount of lump-sum tax on services related to accommodation: the rate of 17% applied until the end of 2020, and in 2021 it was unified with the rate provided for lump-sum taxation on rent, i.e. 8.5% and 12.5% on the excess of revenues over PLN 100K.
From 2021, lump-sum taxation can be applied by taxpayers renting real estate as part of business activity. Up to now, the solution was available solely to taxpayers earning revenue from private tenancy. It should be emphasized, however, that a clear distinction between these sources of income still has not been made, which often led to problems with their proper classification. In practice, renting out more real estate is treated as renting real estate as part of business activity. It seems, however, that now, when both private tenancy and renting real estate as part of business activity are to be covered by a uniform lump-sum taxation, the practical significance of source of revenue qualification is likely to diminish. Up to now, re-qualifying private tenancy covered by lump-sum taxation on recorded revenue as renting real estate as part of business activity led to applying a progressive rate from 17% to 32%, instead of the fixed rates of 8.5% and 12.5%.
From 1 January 2021, the taxpayer subject to fixed amount tax may, in the period from 2021 to 2024, increase the number of employers by three without losing eligibility for this type of taxation. Furthermore, exemption from fixed amount tax in a situation where the taxpayer's spouse conducts the same business activity was partially waived: starting from 2021, this solution became unavailable only if the spouse pays income tax on general terms or is subject to lump-sum taxation. Therefore, it is permissible to apply the fixed amount tax solution if both spouses conduct business activity in the same scope and both decide to apply it. Additionally, 2021 brough an increase in fixed amount tax rates, pursuant to the Notice of the Minister of Finance, Development Funds and Regional Policy of 5 November 2020 (Polish Official Gazette "Monitor Polski" of 2020, item 1083).
The amendments introduced to lump-sum taxation of recorded revenue seem beneficial, however, it should be borne in mind that the profitability of choosing this form of taxation depends on the individual conditions under which the taxpayer operates. On the one hand, when choosing this form of taxation, taxpayers do not have the right to reduce the tax base by deductible costs, which means that the lump-sum taxation is usually the most profitable for taxpayers with low expenses. On the other hand, the lump-sum taxation of recorded revenue may seem appealing due to low taxation rates, in particular for some industries, e.g. construction work-related activities, taxed at a rate of 5.5%. Another advantage of lump-sum taxation is that it allows for the use of single-entry bookkeeping system, which poses an advantage to those taxpayers guided by the desire to simplify their tax settlements, and not by economic calculation.
Thus, having considered all factors, lump-sum taxation of recorded revenue may turn out to be beneficial to some taxpayers, yet, primarily to those not involved with liberal professions. Despite many amendments to the lump-sum application scheme, it is unlikely to become an appealing form of taxation to liberal professionals. In a situation where the lump-sum rate is at 17%, it seems more advantageous to choose a 19% flat tax settled on income, and not on revenue.
The amendments introduced to fixed amount taxation are not of similar magnitude. Nevertheless, both the possibility of reducing hiring-related difficulties for companies facing the expected deterioration of the market situation, and the possibility of fixed amount taxation for spouses operating in the same business should be assessed positively. Although the increase in the fixed amount tax rates is not significant, it should be remembered that this method of taxation is most often used by small entrepreneurs who now struggle with economic turmoil induced by the COVID-19 pandemic.
Author: Sebastian Kałuża, Tax Advisor, Supervisor, Tax, Global Mobility Services, KPMG in Poland