There is a perception that the choice of the form of taxation of a sole proprietorship (Polish: JDG) or income from participation in companies (some!) can only be made at the beginning of the year. However, this view is not always justified. There are situations in which a change in the form of taxation can take place during the year..

Who can choose the form of taxation?.

According to the regulations, the choice of taxation form is available to PIT business taxpayers, i.e. sole proprietors (JDG) and partners of companies that are not corporate taxpayers (i.e. certain general partnerships, civil partnerships and - with certain limitations - partnerships).

The default form of taxation is the tax scale. However, the low profitability of this form for taxpayers with incomes in excess of about PLN 150,000 per year (30,000 PIT-free amount + the second tax threshold of PLN 120,000) causes taxpayers to often opt for other forms of taxation - a flat tax and a lump sum on registered income. A successful change in the form of taxation depends on meeting several conditions. One of them is submission of a statement about the change of taxation form (in writing or through CEIDG) by the 20th of the month following the month of obtaining the first income from business activity (or by the end of December, if the first income was obtained in that month).

The choice of form is valid at least until the end of the calendar year in question. At least, because in the absence of a new statement on the choice of tax form, it is also binding in subsequent years.

How can the form of taxation be changed during the year?.

By the virtue of Polish law, there are two groups of ways to change the form of taxation during the year. The first of these are circumstances regulated in detail in the regulations, which exclude the use of the flat tax and lump sum on registered income. In this type of case, the taxpayer, so to speak, is deprived of the right to choose "line" and lump sum and is obliged to use the tax scale.

Thus, according to the regulations, the choice of the flat tax is impossible if, in the year in which this form is chosen, the taxpayer performs a service for a former or current employer resembling the activities that the taxpayer performed under the employment relationship. For example, if a taxpayer who was employed under an employment contract in January 2024 "switches" to self-employment (i.e., starts working together under a service contract entered into as part of a business with the same entity), and the scope of the activities he performs is similar to those performed under an employment contract, he cannot choose the flat tax in 2024. Interestingly, this restriction also applies in a situation in which one of the partners of a partnership (general partnership, partnership, civil partnership) in which the taxpayer participates performs such a service for a former employer - and not necessarily the one with whom that partner was employed.

A similar situation applies to the lump sum on registered income. Namely, if a taxpayer (acting alone or as part of a non-CIT partnership) who choses to be taxed in the form of a lump sum on registered income, obtains income from this activity from the sale of commercial goods or products or from the provision of services to a former or current employer, corresponding to activities that the taxpayer or at least one of the partners:
1) performed in the year preceding the tax year, or
2) performed or is performing in the tax year
- within the framework of an employment relationship, such taxpayer loses the right to tax in the form of a lump sum on registered income in the tax year.

It is worth noting here that the "grace period" in the case of a lump sum goes a bit further than in the case of a flat tax. Explaining this using the example cited above - the achievement of income from the performance of services for a former or current employer (corresponding to activities performed under an employment contract) in January 2024 will result in the taxpayer not being entitled to a lump sum in both 2024 year and 2025 year.

If one of the situations described above occurs, the taxpayer is obliged to calculate and pay advance payments of income tax according to the general rules (tax scale) from the beginning of the year.

Another case in which there is a change in the form of taxation from a lump sum to a scale is when income is generated from the sources specified in the Law on Lump Sum Taxation. We are talking about income resulting from the following activities:
1) Operation of a pharmacy;
2) Buying and selling foreign currency values;
3) Trading in motor vehicle parts and accessories;
4) Manufacturing of products subject to excise taxes (except electricity from renewable energy sources).

Particularly noteworthy is the third of the prerequisites indicated above - because it is enough that there is a sale (in the course of business) of a small car part in the tax year, and the taxpayer will be obliged to apply the general rules (tax scale) from the beginning of the year!

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Are these the only ways to change the form of taxation?

The second, much more creative way to change the form of taxation is to change forms of business activity. This is because the regulations governing PIT and lump-sum taxation in principle allow "transfer" of the business conducted in the form of a JDG or a company to another entity and the choice of another form of taxation of income (revenue) generated within that entity. At the same time, there is no obstacle for this to be a form of activity similar to the previously conducted JDG/general partnership, partnership or civil partnership. For example, if a flat tax has been chosen within the JDG run by the taxpayer, it is possible to transfer this activity to a newly established general or civil partnership and choose a flat rate as the form of taxation of income from the activity conducted in the form of a partnership without having to wait until the expiration of a given calendar year and change the form of taxation by means of a statement on the choice of the form of taxation..

Are there any limitations?.

It is easy to see that changing the form of taxation in the PIT by changing the legal form of the business that is similar from a legal and organizational perspective to the previous form (e.g., JDG -> general partnership) can, under certain circumstances, lead to significant tax savings. This raises the question of the potential of applying the general anti-avoidance clause (GAAR) to this type of situation. A comprehensive explanation of this thread is beyond the scope of this blog post. In our opinion, however, the risk of applying the GAAR is significantly reduced in such situations. Why?

In order to apply GAAR, a number of conditions must be met. One of them is the so-called intent criterion, i.e. the attainment of an advantage contrary to the purpose or object of the tax law or its provision. In our opinion, it is difficult to successfully argue that changing the form of taxation by changing the legal form of doing business meets the criterion of intent. The choice of a form of taxation is one of the taxpayers' rights granted explicitly by the legislature, which can clearly lead to tax benefits. Therefore, it is difficult to argue that the exercise of this right leads to benefits that are contrary to the purpose or object of the Tax Law (or its provision). However, there are certain categories of situations in which the risk of applying the GAAR will be higher. Therefore, each such situation should be analyzed individually.

The above does not mean, however, that changing the form of business taxation in PIT by changing the legal form of business is not subject to any tax risks. This is because it should be borne in mind that the transfer of business to another entity must take place in a certain way. Practice shows that the most common method in this regard is the "home made" method, which consists in a relatively uncomplicated "rewriting" of contracts and other legal relations to the newly established entity. Such an event may give rise to an obligation to pay a so-called "exit fee," i.e. a remuneration for the transfer of profit-generating potential. This issue should be analyzed individually.

Notwithstanding the above restrictions, one important limitation regarding the choice of lump sum on registered income during the tax year must be borne in mind. Well, according to the provisions of the Polish law, the choice of a lump sum in a given tax year after a change in the legal form of the business carried out:
- Alone to a business carried out in the form of a partnership with a spouse,
- In the form of a partnership with a spouse for activities carried out independently by one or each of the spouses,
- Alone by a spouse for activities carried out independently by the other spouse
is impossible if the spouse(s) applied general rules before the change in the legal form of the business conducted.

Explaining the above with an example - if a taxpayer in January 2024 operated a JDG, under which he chose the tax scale, and in February 2024 made an in-kind contribution of the business operated under the JDG to a general partnership operated with his spouse, in 2024 he cannot choose the registered income lump sum as a form of taxation of income earned under the general partnership.

This taxpayer could, however, choose a lump sum if the JDG he or she runs is subject to line tax.