Managing IT teams in Poland? You may have heard the terms ”Tax-Deductible Costs” or ”Creative Tax” and its 50% deduction on earned income. But what exactly is it and how can you or your employees benefit from this regulation? We have It covered in this blog post along with the 8 most frequently asked questions. Read on to learn more.
What is a tax-deductible cost in Poland?
The rules of personal income taxation can differ from one country to another, so let’s start by defining what they are in Poland. Net income of employees in Poland, also called “take-home earnings” (in Polish na rękę), is calculated from gross income by taking into account personal income tax rates, social security contributions as well as tax-deductible costs. Tax-deductible costs reduce the amount of personal income tax.
The standard amount of tax-deductible cost is low and is a lump sum of approx. 250 PLN / 56 EUR per month (or 300 PLN / 67 EUR per month if employees work in a different town than where they live). It covers the assumed standard monthly costs related to the employment (for instance, the employee’s expenses for their commute to work).
Special rates for authors of copyrighted works
The Polish Personal Income Tax Act allows for special tax-deductible rates for authors of copyrighted works. If they receive a remuneration for the transfer of the copyright, they may apply tax-deductible costs in the amount of 50% of a portion of earned income.
Why 50%? The lawmakers assumed that the author must spend at least 50% of their earnings to create a copyrighted work and that authors should not be forced to collect all the invoices and receipts to prove that they paid for materials and services needed to create the copyrighted work.
Who can benefit from it?
Not all creators may enjoy this benefit – there is a list of types of creative works that are eligible. The list includes, among others, computer programs, music, or scientific literature.
This regulation applies to freelance workers who work according to a “specific work agreement” (umowa o dzieło) or “services agreement’’ (umowa o świadczenie usług / umowa zlecenie).
However, it can also apply to the salaried employees that created copyrighted work, such as university workers, graphic designers, and software developers that are employed, for work requiring thorough analysis and reporting procedures.
Should you, as an employer, implement the scheme?
When applied, the tax-deductible costs scheme for creative work allows employees to reduce their personal income tax and therefore increase their net income (“take-home earnings”). Without increasing employer costs, the employee’s net income can increase by as much as 17% per year.
With that, employers can benefit in the following ways:
- Increase the attractivity of permanent contracts (vs. B2B contracts). This scheme can be used to convince employees to sign permanent employment contracts instead of choosing B2B contracts.
- Support Employer Branding. Companies that offer tax-deductible costs are perceived as more employee-oriented.
- Reduce the cost of salaries or offer higher net remuneration to the employees.
Scheme simulator for your organization
This scheme has gained popularity throughout the IT industry in Krakow with large international software companies, having engineering teams of 1000+ people, utilizing its benefits. The scheme is also being applied in smaller IT firms.
We have prepared a scheme simulator (Google Sheet). Feel free to save your own copy of the scheme simulator and adapt the fields to reflect your organization’s scope.
In this particular example, we simulated the attractivity of the scheme for a Polish subsidiary that employs 15-20 software engineers on full-time employment contracts, where the average gross remuneration is 20 000 PLN per month.
How to proceed further?
To utilize Tax-deductible costs in your organization, the following points will need to be addressed:
How to proceed?
- Analyze the work performed at each position,
- Estimate the amount of creative work
- Analyze employment contracts
- Build a process of documenting the creative work
- Verify if procedures and documents meet the requirements of the general interpretation issued by the Ministry of Finance
- And then implement and train employees on the process
Who? Most companies use law firms or local operational partners who have experience in the subject to help them go through this process to make sure it is executed smoothly and to assure compliance with legal regulations. In addition to this, the process requires cooperation between several parties, including engineering and HR in the organization as well as with the payroll company.
How long? The entire process can take up to 6 months (though it could be in theory faster since the Ministry of Finance has issued on 15 September 2020 a general interpretation on TDC rules, replacing the application to tax authorities for an individual interpretation in place previously).
How much does it cost? The estimated legal fees are approximately 10 000 EUR and can be broken down and viewed under 5 categories:
- Feasibility analysis and audit (approx. 1 900 EUR). The first element is an analysis of the organization including a feasibility study. This element addresses the suitability and verification of possible implementation of a 50% deductible costs scheme.
- Documentation and trainings (approx. 2 900 EUR). The second element in the breakdown concerns documentation and training for the company’s representatives regarding the implementation and application of deductible costs.
- Analysis of the positions (approx. 1 900 EUR). A further breakdown of the costs includes an analysis of the positions and audit of work results in order to assess and qualify employees for work created in the course of employment. This in turn recognizes employees as beneficiaries of the 50% deductible costs.
- Analysis of the procedures and documents (approx. 1 500 EUR). This analysis concerns the compatibility of the chosen model of implementation with the general interpretation issued by the Ministry of Finance.
- Implementation (approx. 1 900 EUR). The remaining costs in the breakdown serve to cover such elements as the implementation of the chosen model along with legal assistance during such a process.
You should also have to plan for some hours spent within your organization (we estimate setup time on 1st year to ca. 16 hours, and 2 hours/employee/month for the reporting on their own creative tasks).
4 important notes if you are convinced about the scheme
- Only work categorized as “creative works” qualifies. Work records have to be detailed and document the creative tasks. Employees need to create a copyrighted work.
- Payroll for an employee may change month to month. Detailed work records need to be created each month. This means that an employee may have a varying amount of work that qualifies so their payroll will change month to month.
- Not all employees will be able to benefit. There will be discrepancies and it is crucial to plan ahead an approach towards the departments that are not eligible (I.e. Sales, Finance, Customer Service).
- Additional workload for HR and Payroll. Administration of the scheme is an overhead – detailed tracking of work is required. This information has to be consolidated by HR and Payroll; employees pay will vary depending on the work they are doing each month.
FAQ – the 8 most frequently asked questions about the Tax-Deductible Cost (TDC) scheme
1. Why might the lack of an implemented creative tax scheme be considered as a missed opportunity for attracting talents?
When a new IT company opens its office in Poland, it gets a bonus for being a new player in the market. After a year or two, it has to compete with other employers on the market. If a candidate has two similar job offers in hand, he will likely choose the one that offers him a higher net income. Moreover, not having a creative tax scheme in place may raise questions such as ‘’Why don’t they have it?’’. To a certain extent, it impacts the employer branding of a company.
2. Could employees refuse offers or leave a company as a result of not having this scheme in place?
For employees and candidates, having a wide range of choice between the IT companies who have the scheme implemented opens up the possibility of movement within the industry and search for higher income.
3. What implementation costs should be considered by an employer?
Legal advisory services, cost of HR engagement in the implementation process (e.g. answering employees’ questions regarding 50% costs, assisting in introducing amendments to employment contracts, ensuring the smooth running of the process), cost of payroll process adjustments, possible increased month-to-month payroll costs, cost of verification of new job positions in terms of possibility of 50% costs application, cost per hour rate of legal counsel.
4. What are the HR issues if some employees are not working on TDC qualifying projects and the person next to them is and receives a tax benefit? How can this be resolved – assuming as with all organizations that employees are likely to discuss pay arrangements with each other?
There is no issue from an HR perspective, the process implications and job position audit clearly indicate what kind of creative work needs to be performed, it is therefore governed by tax regulations and doesn’t apply to unequal treatment.
5. Could the Tax-Deductible Costs scheme be an efficient tool to encourage contractors to move from B2B contracts to employment contracts?
The Polish government’s position is that B2B contracts are accepted as a form of engagement. However, similarly to the UK, the government is from time to time talking about changing this situation, so that contractors who are only delivering services to one company are considered to be in fact employees. The following B2B contractors might be targeted by the government:
- Earning a yearly revenue over 85 500 PLN (ca. 19 000 EUR)
- Issuing one sales invoice monthly,
- Cooperating with only one customer.
Moving from B2B contracts to employment contracts may address the risk to be targeted, and creative tax might help the company to optimize costs related to transition.
6. What does the copyrighted works tracking process look like?
Procedures for verification if an employee created any copyrighted works include reports confirming the creation of copyrighted works and an indication of the place where these are stored. In addition, in order to avoid any doubts and to determine precisely the duties of employees, an unambiguous provision imposing a duty on employees to create specific copyrighted works under their employment relationships should be introduced to the employment contract.
7. Who determines whether work qualifies each month for the benefit? Who is responsible for that determination when proven to be incorrect? Do we recover errors from the employee?
At least one work item must be created so that the employee is eligible for 50% deductible costs. Each role has a list of works associated that qualify. For developers it is automatic – any code that they create qualifies as each line of code can be a copyrighted work.
The direct supervisor/manager would be responsible for the verification of the work performed and must approve a report with the summary of work created (on a monthly basis). Exceptions when no copyrighted work was produced in a specific month would be reported to the payroll company. Should a tax audit be performed, only the existence of the work exists (and not the content of the works itself).
8. What happens if someone is sick or on holiday – Are their take-home earnings reduced as they won’t have been working on eligible projects?
Sick leave (up to 30 days) or holiday does not impact creative tax and salary when the employee works at least 1 day during the month.
If you are looking for information about setting up your presence in Poland, download our Kraków IT Market Report 2019.
If you are interested in implementing the Tax-Deductible Costs scheme in your organization, contact us at MOTIFE to learn more.
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