When an entrepreneur begins business activity for the first time, they may take advantage of a specific tax incentive available in Poland: a "tax credit." What exactly is this tax credit, and what conditions must an entrepreneur meet to qualify for it? We address these and other questions in this article.

What is a tax credit?

A tax credit is a tax incentive designed for individuals who are starting a business (excluding agricultural activities). This incentive allows for the deferral of personal income tax payments for a chosen year.

How does this tax benefit work?

When starting a business, an entrepreneur (operating as a sole proprietor) is not required to pay income tax on earnings generated during the first year of operation. In effect, the entrepreneur is exempt from making advance personal income tax payments throughout that year.

Instead, the total tax liability for that year’s income is spread out over the following five years. This means the tax is paid in five equal installments (20% each) when filing tax returns for the five consecutive tax years immediately following the year in which the exemption was applied.

How is the "year of starting business activity" defined?

An application for this tax incentive may be submitted in the year following:

1) the year in which the business activity began, provided that the activity was carried out for at least 10 full months during that initial year;

or

2) the two-year period following the year in which the business activity began, if the condition specified in point 1 was not met.

Who qualifies as a "starting entrepreneur"?

A "starting entrepreneur" is an individual who is launching a business (other than in the agricultural sector), including someone who has not engaged in any business activity within the last three years.

What conditions must an entrepreneur meet when applying for a tax credit?

An entrepreneur applying for this benefit must:

• Hold the status of a small taxpayer;
• Employ at least 5 people under employment contracts;
• Have an average monthly income equivalent to at least 1,000 euros (denominated in Polish zlotys), calculated based on the average euro exchange rate set by the National Bank of Poland on the last day of the preceding year;
• Use a tax regime for income taxation based on the standard progressive tax scale.

We discuss the various tax regimes available to entrepreneurs in Poland in more detail in our article.

How can one take advantage of this tax benefit?

An entrepreneur must submit a written statement of their intention to utilize the tax benefit to the tax office no later than January 31 of the tax year in which the benefit is intended to be applied.

What tax return must be filed?

At the end of the tax year, the entrepreneur is required to file an annual tax return – for example, using form PIT-36, accompanied by form PIT/Z – which includes information regarding the use of this tax benefit.

Does this benefit qualify as *de minimis* aid?

Yes, this benefit is classified as *de minimis* aid; its value is counted toward the limit established for an entrepreneur regarding the receipt of such aid.

What are the advantages of a tax credit?

Taxpayers who utilize this credit can defer the payment of income tax for a given tax year over the subsequent five years – a longer period than would be the case under standard tax rules.

Using this tax credit does not entail any additional fees or interest, making it a more advantageous option than a bank loan.

We discuss the conditions for granting a tax credit against corporate income tax in Poland in another one of our articles.

Basis: Art. 44, paragraphs 7a–7k of the Personal Income Tax (PIT) Act.