The Polish Ministry of Finance announces measures that aim at verifying the self-employed. The objective of this verification is to confirm the “entrepreneur” status, i.e. to determine if a self-employed person conducts business activity. The idea behind the planned actions is to check whether self-employment is not in fact a hidden employment relationship.
Self-employment in Poland
The Polish law does not define the concept of self-employment. It is assumed that we deal with self-employment in a situation where a natural person undertakes business activity on his or her own account, on his or her own responsibility and at his or her own risk. The Polish law treats a self-employed person as a person conducting business activity. Any settling of accounts between a company (client) and a self-employed person are based on invoices (usually VAT invoices).
For a self-employed person, the biggest advantage of conducting business activity is the ability to demonstrate higher tax deductible costs in the tax calculation, apply lower tax rates and pay social security contributions at a fixed rate, regardless of income. From the point of view of a company (client), self-employment is also beneficial because it results in lower operating costs. These factors make self-employment more profitable than working with a given person on the basis of an employment contract.
All this makes the taxation of the self-employed significantly lower than the taxation of people employed under an employment contract. Given the above, it is very important to ensure that the activities of a given natural person who provides services in the form of self-employment for us bears the hallmarks of conducting business activity.
Business activity definition
The Polish tax regulations include a negative definition of business activity, i.e. they list conditions which, if met, mean that the activity of a given natural person cannot be classified as business activity. According to the Polish regulations, activities are not considered business activity if all the following conditions are jointly met:
- liability towards third parties for the result of these activities and their execution, excluding liability for delicts, shall be borne by the party ordering these activities
- these activities are carried out under the direction and at the place and time designated by the commissioning party
- the person performing these activities does not bear the economic risk associated with conducted business activity.
Even if only one of the above criteria is met, the Polish tax authorities qualify the activity of a natural person as an income from personal activities. This will mean that a natural person cannot settle such an income as a part of his or her business activity, which will result in the inability to apply a preferential taxation method and settle social security contributions in the manner provided for entrepreneurs.
The risk of losing the enterpreneur status
The loss of the entrepreneur status by a natural person conducting business activity means the necessity to pay income tax and social security contributions in line with general principles. As a consequence, instead of a flat tax rate of 19%, which is most common in such a situation, and fixed social security contributions (1,320 PLN or 560 PLN, if certain conditions are met) it will be necessary to pay income tax according to the scale (even 32%) and settle social security contributions according to the rules provided for employees. As a consequence, a natural person will have a smaller net amount at his or her disposal and ordering party will be required to incur higher costs of social security contributions.
It should be noted that, in accordance with the currently applicable regulations, the need to settle income tax and social security contributions of a person who loses the entrepreneur status correctly is borne by the ordering party (company). As a consequence, it is the ordering party (the company cooperating with a self-employed person) that will be obliged to pay all social security contributions and income tax for the last few years, because in this situation it is the client that will act as a payer, the same as it is with payments under an employment contract.
Apart from a different mechanism of settling income tax and social security contributions by a self-employed person, serious consequences will also occur in VAT. The loss of the entrepreneur status by a natural person conducting business activity will mean that VAT invoices issued by that person do not give the client the right to deduct VAT. For the company (client) this will mean the need to correct the VAT returns, refund unduly deducted tax together with interests due and the risk of the Tax Office imposing an additional VAT penalty.
Enterpreneur test
The Ministry of Finance announces verification of the self-employed (one man entrepreneur). To this end, it announced the introduction of so-called “entrepreneur test”. In the assumptions, this test, carried out by the Polish tax authorities, would allow to determine who is in fact an entrepreneur and, as a consequence, may benefit from preferential taxation. The main purpose of the test would be to identify people who use self-employment as a hidden employment relationship, i.e. conduct business activity only for one entity, issue one invoice per month and do not bear the economic risk of their business activity.
Ultimately, after a wave of criticism from NGOs and business circles, the “entrepreneur test” will not be introduced to the Polish law. At the same time, the Ministry of Finance announces verification of the self-employed by using the existing tools and information. Given the above, it is expected that tax audits of the self-employed will intensify and that the nature and characteristics of their business activity will be verified.
Recommended actions
If you, as the client, cooperate with the self-employed, we recommend you verifying the signed contracts in terms of meeting the above-mentioned conditions for conducting business activity. In particular, cooperation agreements should be reviewed from the point of view of the liability for services and how they are performed. In some cases it may be necessary to change the model of cooperation with a given person. Carrying out the above actions will allow to reduce or minimise the potentially high risk for your company resulting in the need to meet the obligations of income tax and social security contributions payer, i.e. paying income tax and social security contributions as well as submitting amended VAT declarations for several years back.
