Who can choose flat taxation and under what conditions?
Since January 1, 2004, the provisions of the Law on p.d.o.f. allow the following. Choice of taxation of income from non-agricultural business activity 19% with a flat tax. However, during the two years that this regulation has been in effect, a number of doubts have arisen in practice regarding the applicability of the tax rate indicated above.

Selection by declaration
The right to use the flat tax on income from non-agricultural business activities is granted to taxpayers under Article 9a (2) of the Law on p.d.o.f.
According to its wording, if you decide to opt for a flat tax, you must file with the appropriate head of the tax office until January 20 tax year a written statement on the choice of this method of taxation, and if the taxpayer begins to conduct business activities during the tax year - by the day preceding the date of commencement of such activities, but no later than the date of obtaining the first income. Sometimes the tax authorities have sample forms on which taxpayers submit the above statements. Usually, however, it is the case that the taxpayer himself declares in writing that he chooses 19% flat taxation
The choice of the method of taxation made in the statement referred to above also applies to subsequent years, unless the taxpayer - within the deadline until January 20 tax year - shall notify in writing the competent head of the tax office of the abandonment of this method of taxation, or shall submit within this period a written application or statement on the use of the forms of taxation specified in the Law on Lump Sum Income Tax. (1)

Worth knowing:
A taxpayer can deduct only losses and social security contributions from income taxed on a flat tax, and only health insurance premiums from a flat tax. If the taxpayer opts for a flat tax, he also does not benefit in this regard from joint taxation with his spouse or as a single parent.

The choice of taxing the income indicated above with a flat tax means that this method of taxation will apply to not only the taxpayer's sole proprietorship, but also other forms of business (such as a general partnership).

Example:
Vladimir K. is self-employed and is subject to 19% flat tax. In addition, he has become a partner in a civil partnership. In this situation, the question arises: is it possible to tax income from self-employment with a flat tax, and income from participation in a civil partnership - on a general basis? Such a solution is unfortunately not possible. The 19% flat tax applies to all income earned from various forms of business activity.

Submission of a statement after the deadline results in the taxpayer may not use the flat tax form in a given tax year.

Examples:
1. Marian W. has been conducting business activities taxed on a general basis since 1999. In the first quarter of 2006, he intends to additionally undertake - within the framework of a general partnership - activities taxed with 19% flat tax. In this situation, if Marian W. wishes to take advantage of the flat-rate taxation in 2006, he should submit a statement to this effect by January 20, 2006. (taxed at the linear rate will then be both the income earned from the independently run business and the income earned from participation in a general partnership). If Marian W. fails to submit the statement by the deadline indicated above, the income he receives from both forms of business activity will be taxed on a general basis.
2. Jacek K. conducted business activities taxed on a lump sum from registered income. However, during the year he lost the conditions for taxation in this form. In this situation, can Jacek W. choose flat taxation?
The First Tax Office Łódź-Górna, in a letter dated April 30, 2004, ref. I-415/14/24/2004, stated that the fact of losing the right to tax in the form of a lump sum does not make it possible to use the linear tax on income from non-agricultural business activity: "In fact, according to Article 9a (2), the above method of taxation is available to taxpayers who, by January 20, submitted a written statement on their choice, and in the case of taxpayers who start conducting business activities during the tax year - by the day preceding the date of commencement of such activities, but no later than the date of obtaining the first income. Thus, the legislator did not provide for the possibility of using the flat tax method for taxpayers other than those listed in Article 9a paragraph 2 of the Law on p.d.o.f."

As can be seen from the examples cited above, it is not possible to take advantage of the 19% flat tax if a business activity is already being carried out during the tax year (such an election can be made only from the new tax year - by filing an appropriate declaration). However, a taxpayer who has liquidated an activity (e.g., taxed in the form of a tax penalty) during the tax year, starting a new activity during the tax year can take advantage of the flat tax.

Provision of services to the employer
In addition, the 19% taxation at the flat tax rate may not be used by a taxpayer who, while conducting business on his own or in the form of an unincorporated company, earns income 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 performs during the tax year
- Within the framework of an employment or cooperative employment relationship.
Such a taxpayer loses the right to be taxed at the 19% rate during the tax year and is obliged to file appropriate declarations on the amount of income earned since the beginning of the year and to pay advance payments calculated using the tax scale, as well as default interest on the arrears of these advances.
According to the regulations, therefore, a taxpayer can take advantage of 19% flat taxation if he performed work for a former employer before the year preceding the tax year in which he wants to take advantage of this form of taxation. For example, a legal counselor was employed by the company in question under an employment contract until the end of 2004. Since 2005, he has provided legal advice to the entity under a service contract. In 2005, he was taxed on a general basis. As a result, as early as 2006. - despite the provision of business services to his former employer - he can take advantage of the 19% flat tax.
As a general rule, an employee who is self-employed can take advantage of the 19% flat tax if he or she the subject matter of the activities performed by him - within the framework of this activity - for a former or current employer is not the same as the work performed for this employer.

Example:
Ryszard S., who is employed by the entrepreneur under an employment contract, is simultaneously engaged in independent business activity. As part of this business activity, he in turn sells goods to his employer. In this situation, the question is whether Ryszard S. is entitled to benefit from 19% flat tax?
The provision of Article 9a(3) of the Law on p.d.o.f. refers to the provision of services within the framework of an employment or cooperative employment relationship. The sale of goods is something generically different from the performance of work, and therefore it should be considered that Richard S.'s income from business activities can be taxed with 19% flat tax.
However, the issue would no longer be so straightforward if Ryszard S. was employed by his employer as a member of the board of directors and sold the same products to his employer as part of his business. Because the scope of Richard S.'s duties within his company and his employer's business would overlap, flat taxation could not apply (see, for example, the letter from the Tax Chamber in Kielce dated July 11, 2005, ref. PD2-4151-25/05).

Business income vs. assignment contracts
There is also the question of whether, while running a business, it is possible to simultaneously perform other activities under contracts of mandate, and tax the income therefrom separately (outside the business), while retaining the right to tax income from business activity with a flat tax?
The Tax Office in Białystok commented on this issue in a letter dated June 18, 2004, ref. PBI /415-64/BD/04. As stated in the text of the letter, income from activity pursued personally (Art.13 pt. 8(a) of the p.d.o.f. Act) is considered to be income from the performance of services under a contract of mandate or contract for specific work, obtained exclusively from a natural person conducting business activity, a legal person and its organizational unit and an unincorporated entity. Pursuant to Article 41(2) of the p.d.o.f. Act, payers are not obliged to collect advance payments on payments made under contracts for specific work or contracts of mandate, if the taxpayer makes a statement that the services performed by him are part of his business activity.
The tax office stated as follows in this connection: "...in a situation where individual orders are carried out exclusively for the benefit of sole proprietorships, legal entities or organizational units without legal personality, and the principal (payer) has not been provided with the statement referred to in Article 41, paragraph 2 of the Law on p.d.o.f., then the remuneration paid on account of order contracts, or contracts for specific work, is income from activity performed personally, settled on general principles, on which the payer collects advance payments in accordance with Article 41, item. 1 of this law. Due to the fact that the flat tax applies only to income from business activities, earning income from personally performed activities within the meaning of Article 13 para. 8 of the Law does not result in the loss of the right to this form of taxation."

Conclusion of management contracts
According to Art. 13 pt. 9 of the Law on p.d.o.f., income from personally performed activities is considered to be, among other things, income received on the basis of business management contracts, management contracts or contracts of a similar nature, including income from such contracts concluded as part of the taxpayer's non-agricultural business activity - with the exception of income received by persons, regardless of the manner of their appointment, who are members of management boards, supervisory boards, committees or other governing bodies of legal entities.
With this wording of the above provision, it is clear that a taxpayer who is engaged in business and enters into a business management contract (or management contract) cannot take advantage of the flat tax rate. Such services will be taxed according to the tax scale. The payer is obliged to collect advance tax payments on salaries paid (Article 41(1) of the Law on p.d.o.f.).

Rental income
Business taxpayers also sometimes have doubts about whether their rental income should be combined with their business income, taxed at the flat rate.

Example:
Kazimierz T. is engaged in the business of construction services, which is subject to 19% flat tax. In addition, he intends to rent a residential unit - for business purposes. In this situation, the question arises, how should rental income be taxed? The flat tax rate is applied only to income earned from non-agricultural business activities. This income is not combined with other income, taxed according to the tax scale - including rental income, as long as this rental is not conducted as part of a business activity. Therefore, if the taxpayer's rental income is to be included in income from business activity (this will be the case in the case of rental of assets related to business activity - cf. Art. 14 par. 2 pt. 11 of the p.d.o.f. Act, or when the lease is the subject of this activity), this income will be taxed with a flat tax. In other cases, the lease will be treated as a source of income separate from business activity (Art. 10(1)(6) of the P.D.O.F. Act).

Legal basis: Act of July 26, 1991 on Income Tax on Individuals (Journal of Laws No. 14, item 176, as amended), Act of November 20, 1998 on Lump Sum Income Tax on Certain Income Earned by Individuals (Journal of Laws No. 144, item 930, as amended).

(1) Pursuant to Articles 9 and 29 of the Law of November 20, 1998. on flat-rate income tax on certain income earned by natural persons, a written statement or, respectively, an application on the choice of taxation in the form of a lump sum on registered income or a tax card for a given tax year must also be submitted to the competent head of the tax office no later than January 20 of the tax year, whereby if by January 20 of the tax year the taxpayer does not declare liquidation of business activity or does not select another form of taxation, it is deemed that he continues to conduct activity taxed in the form of a lump sum on registered income or, respectively, a tax card.

From departmental writings:

Actual non-performance of benefits under the employment relationship
versus flat taxation
(Letter from the Tax Chamber in Warsaw dated July 14, 2005, ref. 1401/FA/4117-14/11/05/AG)

Taxpayer question: Despite being employed as a lawyer at S - Sp. z o.o., in the period from 5.11.2003 to 31.01.2005. - due to being on sick leave, maternity leave, paid vacation leave and unpaid maternity leave - I did not perform any activities for the employer under the employment relationship. On 27.08.2004 I started a business activity and as a form of taxation of this activity I chose the flat rate taxation. 1.02.2005r. - as part of my business activity - I concluded a legal consulting contract with my former employer. In this situation, can I continue to use the flat rate taxation?

Tax authority's position:
(...) In the case at hand, it is an undisputed fact that the taxpayer receives income from the provision of services to an entity with which she had an employment relationship. Therefore, the key issue in the case at hand is to determine whether the services provided in the course of the business performed for the former employer correspond to the activities performed in 2004 and 2005 under the employment relationship.
The facts presented show that in the period from 5.11.2003 to 31.01.2005 the taxpayer did not actually perform any activities for S. Sp. z o.o. under the employment relationship, including activities that are the subject of the legal consulting contract of 1.02.2005, due to sick leave due to pregnancy, maternity leave, paid training leave and unpaid parental leave. Thus, the premise for the exclusion of business income from taxation at the single rate of 19% does not exist.