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Changes in accounting and finance surprise no one. The tax authority’s latest idea should therefore cause no surprise: it has decided to scrutinise entrepreneurs using the flat 19% income tax. The introduction of the so-called entrepreneur test is intended to curb misuse of the lower tax rate. These measures are envisaged as further support for tightening the tax system, a process under way in recent years.
What is flat-rate income tax?
At present, an entrepreneur starting a business may use the general tax rules or the flat income tax. By choosing the latter, they do not enter the second income bracket and thus avoid the 32% tax rate, instead using the lower 19% rate. This benefits many taxpayers with higher incomes: the rate remains constant regardless of business income. This method is usually chosen by entrepreneurs whose annual income exceeds PLN 100,000.
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What does the entrepreneur test involve?
It is meant to identify entrepreneurs whose activity is based on business contracts with one counterparty, often involving a single collective invoice for the services performed. Activity conducted in this way closely resembles employment, except that both sides incur much lower tax costs. According to the tax authority, this needs regulation because it runs counter to the spirit of entrepreneurship. By limiting ourselves to one client, we do not develop entrepreneurship, although that was the intention behind introducing the flat income tax. Current law, however, permits such an arrangement if the contract between the entrepreneur and the counterparty is properly drafted. To change this, the Ministry of Finance would ultimately have to amend the legal definition of business activity while introducing clear limitations and exclusions.
The entrepreneur test is intended to help distinguish employees from entrepreneurs. This is extremely difficult, because the definition of an employee assumes that they are ready to do work specified by the employer at a place designated by the employer. The situation can be similar for an entrepreneur. The distinction is therefore to result from an analysis of invoices issued. According to the Ministry of Finance, the entrepreneur test provisions are to be limited to an amendment of Article 5b of the PIT Act. The sole purpose of this proposal is to change how the income of some business operators is classified. A negative test result would therefore not automatically mean removal from CEIDG, conversion of a service agreement into an employment contract or application of employee social and health insurance rules. PIT changes alone provide no legal basis for such interference, and tax authorities would not take over the powers of the National Labour Inspectorate or ZUS. Hypothetically, if the effects of the entrepreneur test were extended to social insurance, which would require entirely different legislation, entrepreneurs earning more than 60% of the average wage would have to pay higher contributions than before.
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Summary
To make that distinction, however, many similar cases would need to be analysed to avoid discriminating against some entrepreneurs in favour of others. A clear and fair solution will certainly require an enormous amount of work.
We shall see, then, how the announced changes turn out.
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