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Revenue in personal income tax

Pursuant to a general rule, individuals pay tax on the total income earned in a given year. In other words, we reduce revenue from various sources by expenditure that relates to the revenue, and work out the sum total of income. Then we calculate income tax on the total income according to the existing taxable bands. This method for determining the total income also involves the constraint that a loss associated with one source of income must not reduce the overall income.

Example:

In 2012 Rob's revenue and expenditure was as follows:

- revenue from copyright: 20,000 PLN, expenditure: 10,000 PLN;
- revenue from dependent personal services: 31,500 PLN, expenditure: 1500 PLN;
- revenue from business activities: 30,000 PLN, expenditure: 40,000 PLN.

So Rob obtained the following income from individual sources of revenue:

- copyright ­ income: 10,000 PLN;
- personal dependent services – income: 30,000 PLN;
- business activities – loss: 10,000 PLN.

Thus, Rob's total income amounted to 40,000 PLN. He will pay the tax on that income.

He did not obtain income from business activities, and he will be able to deduct the loss from income derived from that source over the next 5 years, provided that no more than 50% of the entire loss is deducted in a single year.

If we wanted to calculate Rob's total income as the difference between total revenue and total expenditure, we would have:

revenue: 81,500 PLN – expenditure: 51,500 PLN = 30,000 PLN.

If we determined the total income in the above manner, the loss from business activities (i.e. 10,000 PLN) would be covered with income from other sources. Unfortunately, pursuant to the Personal Income Tax Act, income must not be determined in this way.

Among the revenue sources listed in the Act there are also some sources that we treat “separately”. In other words, we do not add them up to other income but we calculate the tax on such sources “on an individual basis”.

Such sources include:

a) a business activity subject to the flat-rate tax;
b) income from securities (shares, bonds);
c) income that is settled according to the lump-sum scheme (such as prizes from competitions, or civil law agreements up to 200 PLN).


What is revenue?

According to the Personal Income Tax Act (PIT Act), “Revenue consists of money and monetary assets received by or made available to the taxable person during a calendar year, as well as the value of benefits received in kind and other free performances”.

If you look the quoted article up in the Act, you will find that it contains reservations and indicates the sources of revenue to which this definition does not apply. Exceptions refer to revenue from the following sources:

1) non-agricultural business activities – here the revenue consists of amounts due, even if they have not been received;
2) special branches of agricultural production – here the income (and not the revenue) is estimated based on the size of agricultural production;
3) some capital gains – here the revenue can comprise amounts due or the value of shares that have been taken hold of;
4) sales of real property, cooperative ownership right to premises and other property (e.g. a car) – the revenue is the amount received less the selling costs;
5) not covered by disclosed sources, or coming from non-disclosed sources.

– here the amount of revenue is estimated based on a taxable person's expenditure.

We will deal with the exceptions in due time. Now let us have a look at the basic definition, in which several surprises are hiding too.

The first thing that should be noted is: revenue is not just money. In general, we can say that revenue also comprises non-financial benefits received by a taxable person. Such benefits may include, for example, a material bonus granted by the employer (e.g. a laptop for good work performance).

When it comes to money or monetary assets (with monetary assets including bills, bills of exchange, cheques, etc.), they become revenue if received by or made available to a taxable person. Basically, a person receives money when they get it into their hand but nowadays, money is usually made available to them. The moment that money becomes available is the time when a taxable person is able to use it.

Example:

Sean works in a factory. On the twentieth day of each month, the employees can pick up their monthly wages in cash at a corporate cashier's window. So usually there is quite a queue in front of the window on the twentieth of each month. Sean collected his last wages from the cashier's window as late as on 22 January. So when did revenue originate for Sean?

Although Sean received his wages on 22 January, it had already been made available to him on 20 January (because on that day he could go to the cashier's window and collect the wages).

Thus, the revenue day in this case will be the day when the wages was made available to the employee.

If revenue is made available to a taxable person, it means that the money or monetary assets are freely accessible for or can be freely used by the person. This will typically be the day when a relevant amount is credited to the taxable person's bank account or the day of payroll approval, which allows the person to collect their remuneration at the corporate cashier's window.

Currently, most of the revenue is transferred to taxable persons' bank accounts, which makes it problematic in practice to determine the moment when the revenue originated for a taxable person. Usually, some time elapses between a taxpayer's (e.g. an employer's) transfer order and the moment when the money is credited to a taxable person's account.

If we considered that revenue arose when money was made available to a taxable person (the person became able to freely use the money), we would say that revenue originates only when the money becomes “physically” credited to the taxable person's account. Unfortunately, a revenue paying entity (which is frequently required to collect a tax advance from such payment) is often simply unable to determine when the money will be credited to the receiving party's account.

Therefore, in real life, taxpayers assume that the revenue day is the day when they have debited their own bank account. Generally, tax authorities (for practical reasons) agree with this approach. If, however, some disputes arose concerning the issue, we should in fact consider that in the period between debiting the paying entity's account and crediting the taxable person's account, the money remains at the bank's disposal.

Although the concept of “making the money or monetary assets available” may raise some questions of interpretation, it is usually much more problematic to establish the meaning of the concept “money value of benefits in kind”.

First of all, in the case of such revenue, we deal with a non-pecuniary performance. If an in-kind benefit or free-of-charge performance constitutes revenue, then – for tax purposes – we have to determine the value of such performance in cash.

Money value of benefits in kind is established based on market prices charged in trading in property or rights of the same kind and type, taking particularly into account their condition and wear, and the time and location when and where they are obtained.

Example:

Kate works in a supermarket. From time to time her employer gives the employees a bonus of foodstuffs and cosmetics. Of course, such a bonus is employee revenue. Its value should be determined based on market prices. In our example, it is most probable that the employer that manages the store gives the employees products from the store’s range. So in this case, the market price will be the “shelf price”, that is the one for which other customers of the store can buy the same products.

For free-of-charge performances (i.e. when a service or some other benefit is obtained), revenue is determined as follows:

- if a performance is related to services falling within the scope of a performing entity's business activity – the value is established based on the prices charged to other customers, i.e. in the same way as in the example above;

Example:

Employees of an outpatient dental clinic receive a performance consisting of free dental treatment and procedures.

In their case, revenue is determined at the equivalent of the price charged to other patients for the same treatments/procedures.

- if a performance is related to services purchased – the value is established based on purchase prices;

Example:

Christopher's employer rents an apartment for him. Christopher's revenue equals the amount paid by the employer for renting the apartment.

- if a performance consists of the provision of premises or a building – the value will be an equivalent of the rent that would be payable if a rental agreement was concluded for the premises or the building;

Example:

We have a situation similar to the above, but this time the employer does not pay the rent for the apartment where the employee stays, but provides them for free with, say, a company apartment. Here the revenue will be the “rental value”. In other words, it must be determined what the price would be for renting a similar flat in a given locality, and the corresponding revenue should be determined at that amount.

- in other cases ­ the value is established based on market prices charged on the provision of services or property or rights of the same kind and type, taking particularly into account their condition and wear, and the time and location when and where they are made available.

Example:

The company gives a company car to a member of the management board, which they use to go on 10-day holiday.

Obviously, it is the free use of the car that is the revenue here. Revenue should be measured at market prices; we should therefore determine how much we will pay for the rental of the same car type as the one provided to the board member for 10 days in a given locality.

For partially paid performances, a taxable person's revenue is the difference between the value of such performances, as determined in accordance with the above-mentioned principles, and the fee paid by the taxable person.

Example:

The employer partially finances Sally's trip abroad. The cost of the trip is 3000 PLN. Sally pays 1000 PLN, and the reminder of the sum is paid by the employer.

So Sally's revenue is 2000 PLN.

Revenue in foreign currencies is converted into PLN according to the average FX rate announced by the National Bank of Poland, as applicable on the last working day preceding the revenue day.

Example:

Ann completes a translation assignment for an Italian customer. She receives remuneration in EUR on 28 January 2013.

For tax purposes, the revenue should be converted according to the average exchange rate of the NBP, as applicable on the last working day preceding the revenue day. Since 28 January is Monday, the last working day preceding the revenue day will be Friday, 25 January.

Sources of revenue

Tax authorities are determined to tax as many sources of revenue as possible. Therefore, in principle, almost any revenue item is subject to the tax. Of course, there are exceptions to this rule: some revenue items are not subject to income tax, because they are excluded by a specific provision, and certain revenue items are tax-exempt.

Taxable sources of revenue (in accordance with Article 10 of the Personal Income Tax Act) include the following:

 

1) service relationship, employment relationship, including cooperative working relationship, membership in an agricultural production cooperative or other cooperative engaged in agricultural production, putting-out system, retirement pension or disability pension;
2) contractual professional services;
3) non-agricultural business activity;
4) special branches of agricultural production;
5) rental, subletting, lease, sublease and other contracts of a similar nature, including lease and sublease of special branches of agricultural production and an agricultural holding or its components for non-agricultural purposes or for management of special branches of agricultural production, with the exception of assets related to a business activity;
6) capital gains and property rights, including transfer of property rights for consideration;
7) transfer for consideration of:

a) real property or parts thereof, and interest in real property;
b) cooperative ownership right to residential or commercial premises, and the right to a single-family house in a housing cooperative;
c) the right of perpetual usufruct of land;
d) other property;

- if the transfer for consideration is not effected as part of a business activity and was completed: in the case of the sale of real property and property rights referred to in item a-c – before the expiry of 5 years following the end of the calendar year in which the acquisition or construction took place; and in the case of other property – before the expiry of six months following the end of the month in which the acquisition took place; in the event of an exchange transaction, such periods apply to each party to the transaction;
8) other sources.

Revenue from employment relationship (and related relationships)

This is certainly the most common source of revenue, because almost everyone was, is or will be an employee. In general, we can say that revenue from an employment relationship comprises all benefits received by an employee in connection with work. Importantly, they do not have to be benefits received directly from the employer.

Example:

Employees of a Polish company erect a building for a foreign counterparty of their employer. The foreign counterparty provides employees with a free accommodation. Although this benefit is not provided directly by the employer, it will be considered revenue from the employment relationship for tax purposes.

In accordance with Article 12 para. 1 of the Personal Income Tax Act, revenue from a service relationship, employment relationship, cooperative employment relationship or putting-out system is understood as all pecuniary payments and the money value of benefits in kind or their equivalents, regardless of the source of funding for such payments and benefits, and in particular:

- basic pay;
- overtime pay;
- various types of allowances;
- awards;
- payments in lieu of leave not taken;
- all other payments, regardless of whether their amount has been fixed in advance;
- pecuniary performances for the employee's account;
- value of other free or partially paid performances.

Pursuant to this provision, revenue from work is not limited to remunerations specified in the labour law regulations. Revenue also includes pecuniary performances, as well as the value of non-pecuniary performances, including free performances, regardless of their source of funding, and whether their amount was fixed in advance (e.g. in a contract of employment) or not.

The catalogue of revenue items given in Article 12 para. is not exhaustive. Therefore, revenue from employment relationship includes all performances/benefits received by an employee from their employer (or another entity) in connection with the current employment relationship or related relationship.

Employee

We should remember that revenue from an employment relationship may only be received by an employee. Thus, if a person receiving revenue is not an employee, they cannot obtain revenue from an employment relationship.

Within the meaning of the Personal Income Tax Act, the “employee” is a person remaining in the service relationship, employment relationship or cooperative employment relationship, or covered by the putting-out system.

This definition is much broader than that resulting from labour law (Labour Code), since the tax legislation understands the employee not only as a person remaining in the employment relationship and cooperative employment relationship, but also as a person remaining in the service relationship, or covered by the putting-out system. Therefore, the employee definition will not cover people who perform work under a contract of mandate, a specific-task contract, an agency contract or a management contract.

In-kind benefits or free-of-charge performances

Employees usually earn their revenue in cash, but not infrequently they receive in-kind benefits or free-of-charge performances. In order to determine the monetary value of such benefits and performances, we apply the general principles that we have already mentioned before.

Unfortunately, the activities of tax authorities and administrative courts are such that almost any performance/benefit other than a pecuniary performance for the employee becomes controversial and risky. Recent rulings of the Supreme Administrative Court (NSA) concerning medical packages, team-building events and commuting workers have proved unfavourable for both employees and employers, and they actually deepen the employers' uncertainty as regards the appropriate settlement of non-material and in-kind performances/benefits.

A survey conducted by one of the research institutes has shown that more than half of the companies have problems determining which non-pecuniary benefits have to be taxed, and which not. Many employers admit that they have resigned from granting employees benefits such as medical packages, company cars or company mobile phones precisely because of tax concerns.

In the case of non-pecuniary benefits, controversies usually boil down to the question of “receiving” such a benefit.

We should note that according to a general, basic definition, revenue consists of money and monetary assets received by or made available to the taxable person, as well as the value of benefits received in kind and other free performances.

As regards a pecuniary benefit, it originates not only when received by but also when made available to the taxable person. In the case of non-pecuniary benefits, revenue consists only of benefits received. So it is not enough for such benefits to be made available to an employee.

Example:

An employer buys swimming pool vouchers for its employees, so each employee can go to the swimming pool once a week for free.

The fact that the employer sponsors the swimming pool admission means that employees earn revenue.

This benefit is made available to employees (everybody can go the swimming pool) but the employee earns revenue only if and when they go to the swimming pool (i.e. when they receive the benefit).

The distinction between receiving a non-pecuniary benefit and having it made available is the subject of increasingly absurd court judgments.

Controversies are also associated with team-building events. The Supreme Administrative Court (in its judgment of 17 January 2012, II FSK 2740/11) stated nothing more nor less than the following:

“A free-of charge performance received is already (...) an opportunity granted to an employee to take advantage of the services purchased by the employer”.

Thus, contrary to the legal provision (and common sense), the Supreme Administrative Court concluded that the employee's tax obligation arises from the mere fact they have received an invitation to such event, regardless of whether the employee even took part in it and to what extent benefited from the proposed activities.

Another important issue related to the taxation of non-pecuniary revenue of an employee is the determination of its value. In a situation where an employee receives an in-kind benefit or free-of-charge performance, and it is not possible to determine which part of its value falls to the employee concerned, we will not deal with revenue. Revenue is in fact the value expressed in money of in-kind benefits or free-of-charge performances received by a taxable person.

Example:

Let us return to the example in which a swimming pool admission was made available to employees. We have determined that any revenue will arise only when an employee receives such a benefit, that is, when they go to the swimming pool.

If the employer in no way forces its employees to use the swimming pool and it does not record which employees and how many times used the benefit in a given month, then, in practice, we have a situation where the employee who visited the swimming pool received some revenue (or, in other words, received a benefit from their employer), but objectively speaking, it is impossible to determine the value of such revenue.

Example:

An employer running a general merchandise store gives to employees products (such as cosmetics and detergents) that are past their sell-by date.

The provision of the Act requires that such products for employees be valuated according to the prices charged to other customers. The owner would not have sold the products past their sell-by date, so the value of such products is zero. Consequently, such performance will not be a revenue item.

Revenue from contractual professional services

The catalogue of revenue items related to contractual professional services is quite broad.

To put it simply, such revenue is the revenue that is not derived from employment relationship or business activities.

In Article 13 of the Personal Income Tax Act, we find an exhaustive catalogue of such revenue items. The most popular and the most common are:

- revenue from contractual professional services: artistic, literary, scientific, coaching, educational and journalistic, including from participation in competitions in the field of science, culture and art, and journalism, as well as revenue from sports, sports scholarships awarded on the basis of separate regulations, and revenue of umpires/judges/referees related to sports competitions;
- revenue earned by persons sitting on management boards, supervisory boards, committees or other decision-making bodies of legal persons;
- revenue from civil law agreements, such as contracts of mandate and specific-task contracts (excluding contracts concluded as part of a taxable person's business activities).
- management contracts.

In order to determine the revenue from contractual professional services, we apply general principles, i.e. revenue consists of money (and monetary assets) received by or made available to the taxable person, as well as the value of benefits received in kind and other free performances.

Special branches of agricultural production

In general, agricultural activities are subject to agricultural tax, and as such remain outside the framework of Personal (and Corporate) Income Tax Act. However, the legislator has taken into account that some types of agricultural production are not necessarily associated with owning an agricultural holding and paying agricultural tax. In practice, they are closer to a typical business activity.

The catalogue of types of such agricultural production is quite broad, and includes among others: cultivation of ornamentals and mushrooms, breeding poultry and fur animals, apiaries, and breeding purebred dogs and cats.

In general, agricultural production that takes place outside an agricultural holding is treated as a specific type of business activity. A taxable person earning revenue
from such activities may settle it according to the general tax scheme for business activities, or use simplified rules for determining the activity-related income (legal regulations provide for the estimation of income based on a “unit of production” such as one animal or one square metre of crop).

Revenue from capital gains

One of the sources of revenue in personal income tax consists of capital gains and property rights (also including transfer of property rights for consideration).

The most popular revenue items of this type include:

- bank interest (on loans, accounts, savings deposits, etc.);
- interest (discount) on securities, e.g. interest on bonds;
- dividends.

Although they belong to a single source of revenue, individual categories of income from capital gains are taxed in a different way. Some (dividends, interest) are taxed according to the lump-sum scheme, while others according to general rules.

Revenue from property rights

Revenue from property rights includes, in particular, revenue from copyright, rights to inventions, rights to integrated circuit topographies, trademarks and ornamental designs, and the transfer of such rights for consideration.

Thus, revenue from property rights is both revenue from the use of such rights (like licensing), as well as revenue from their transfer for consideration (such as sales of copyright to a novel by an author to a publishing house).

Revenue from transfer of real or other property for consideration

Sale of real property, land or a cooperative ownership right to premises is subject to the tax if it takes place before the expiry of 5 years following the end of the calendar year in which the acquisition or construction took place, and in the case of other property – before the expiry of six months following the end of the month in which the acquisition took place.

Revenue from such sales is the value expressed as the contractual price less the costs of transfer for consideration. These costs may be the costs of property valuation, stamp duty and notarial fee paid in respect of the contract.

We can say that revenue from the sales of real property will be the price (net of selling costs), provided that it corresponds to the market value. A tax authority can in fact determine the revenue at the market value, if the contractual price is significantly divergent from that value, and no reasons for the difference were given.

Example:

A notarial deed concerning the sale of a 50 sqm flat in Warsaw specifies the selling price of 100,000 PLN. Since in the opinion of a tax authority the price indicated in the deed is significantly divergent from the market value, the parties to the transaction have been requested to change the value or indicate reasons for having stated the price that is significantly divergent from the market value.

In response, the buyer and seller have made a statement that they are brothers and agreed on the below-market price because of family ties.

Before a tax authority determines revenue from the sales transaction in the amount other than resulting from the contract, it requests the parties to the transaction (not just one party but both of them, that is the buyer and the seller alike) to change the value or give the reasons why the price had been understated.

Where the parties to the transaction fail to respond, change the value or give the reasons justifying the understated price, a tax authority or fiscal inspection authority will determine the value based on the opinion of one or more experts. If the value determined in this way differs by at least 33% from the value expressed as the price, the cost of the expert opinion will be borne by the transferring party.

Exchange of real property

The term “transfer for consideration” as it appears in legal regulations does not only comprise a contract of sale, but also any other contract providing for a transfer of title for consideration, including a contract of exchange.

A tax obligation arises on the real property exchange as it does in the contract of sale, if the exchange takes place prior to the expiry of 5 years following the end of the year in which the acquisition took place. This period applies to each party involved in the exchange.

For each party to the transfer of title contract, revenue from the transfer for consideration by way of exchange of real property or property rights will be the value of real property or right that is transferred by way of exchange.

Other property

Sales or exchange of other property results in the tax obligation similarly to transactions concerning real estate. Tax revenue arises if sales of a property item takes place before the expiry of six months following the end of the month in which the acquisition took place.

Example:

Joan is summoned by the head of a tax office to account for revenue from the sale of an antique chair that she has sold via an Internet auction site. During the checks, Joan explains that the chair was a family heritage, which she has had in her apartment for many years, and as such the sales transaction does not result in a tax obligation.

Unfortunately, the tax official points out to her that in the item description on the website she wrote:

“A beautiful Boulle-style chair bought two months ago from a well-known collector from Cracow”.

The tax authorities are becoming increasingly effective in enforcing taxes on Internet sales. We should remember that an auction description may attract not only the attention of potential buyers, but also of a tax official.

Other sources

The last source of revenue that we would like to discuss is “other sources”. Generally, this category comprises all items that have not been included in the other categories. This catalogue is not exhaustive, due to the fact that tax regulations often lag behind real life, and even the tax legislator is unable to predict all potential sources of revenue.

Legislation only provides examples of revenue items that do not fall into this category:

- amounts paid following the death of an open pension fund member to a person designated by the deceased or to a member of their immediate family;
- cash benefits from social insurance (sickness allowance, family allowance, carer allowance, etc.);
- maintenance (alimony), scholarships, grants (subsidies);
- revenue not covered by disclosed sources.

Particular attention should be paid to revenue not covered by disclosed sources, or coming from non-disclosed sources. Such revenue is very interesting for tax authorities. Seeking for and taxing such items is among the main priorities of the Polish tax authorities.

This revenue is, generally speaking, that revenue which a taxable person wanted to hide from the tax authorities.

How does a tax authority find about such items? Suspicions that a taxable person has failed to reveal their entire revenue in, say, their annual tax returns may arise if they spend more than they “officially” earned.

Most frequently, tax authorities learn about a taxable person's spending from notarial deeds that civil law notaries must file with the official authorities. So a taxable person who, for example, has bought some expensive real property and at the same time disclosed a modest income in their annual returns will obviously find themselves in the tax authorities' sights. After all, the money to buy the real property must have come from somewhere. And if the revenue disclosed in the annual returns is insufficient to make such a purchase, the difference probably comes from “undisclosed income”.

Example:

Christopher is a young man, just out of college. So far he has not filed any tax returns because he never worked in Poland. However, he has recently bought a flat. This attracted the attention of a tax authority which initiated checks to verify what sources were used to finance the purchase and why no such sources had been disclosed for tax purposes.

Christopher explains that the flat has been purchased with cash, and the source of cash is: multi-annual family savings, which he received from his uncles, grandparents, and other family members, and from the withdrawal of funds from his mother's building society book opened in 1978. All this time, Christopher was supported by his family and did not work in Poland. He went to the United States twice (as part of Work & Travel programme), where he earned some money from waiting tips.

The proceedings concerning undisclosed revenue are usually long and very complicated.

In our example, the tax authority would carefully scrutinize the sources that the taxable person invokes, and it would establish whether the persons that Christopher named have actually made cash gifts to him, and if so, whether such gifts were taxable and finally, whether the amount raised would be enough to purchase the real property.

If it turns out that the amount of revenue from sources “disclosed” in this way is still insufficient, or if the tax authority does not find the taxable person's explanations credible, then the authority would be authorised to apply the penalty tax rate of 75%.

We have not mentioned here one of the most important sources of revenue, that is non-agricultural business activities. Indeed, we devote a separate section to the topic.
 

Tax scale for personal income tax

 

Income up to 85 528,00zl – 18% minus the tax reduing amount 556zl 02gr

 

Income above 85 528,00 zł - 14 839 zł 02 gr + 32% surplus over 85 528 zł

 

Minimum employee wage 2015r.

 

1 750,00 zł

 

Important deadlines

 

On the 15th day of each month – immovable property tax payment by legal persons

 

On the 20th day of each month – income tax advance payment by employers and their employees, income tax advance payment by legal persons

 

On the 25th day of each month – VAT declaration submittal, VAT payment

 

On the 30th of each April – annual income tax return submittal, tax payment