„New Polish Order” – what it might change for landlords in Poland from a tax point of view?

What is the „New Polish Order”?

The “New Polish Order” is a socio-economic program of the Polish government announced recently. Its focus is on 5 main areas: public health service, taxes, pensions, housing and investments. This program has now been consulted and the plan is to introduce it in 2022.

Most of the discussion is around taxes, which will have impact on all who pay them including landlords. Let’s have a look what rental income taxes we have now and what we may have in the near future.

How is rental income taxed now?

Currently all private landlords in Poland have an option to choose between 2 ways how they want to pay rental income tax in Poland:

1. Reduced rate – 8.5% on income up to 100k PLN and 12% on income above 100k PLN. This is the simplified tax method, when no deductions are allowed and tax is paid on real income (amount of rent paid by a tenant)
2. Progressive rate – 17% for income up to 85,528 PLN and 32% on income above 85,528 PLN, with a tax free allowance which is currently 8k PLN. Rental income is summed up with other incomes a landlord generates in Poland and several deductions are possible: service charges and utility bills (if not paid by a tenant), property tax, insurance, maintenance expenses, renovation costs (apart from the first refurbishment after property was bought), cost of buying new equipment, mortgage interest rate, depreciation of the property (1,5% – 10% of property value per year)

The reduced rate has been commonly used in Poland by private landlords, who don’t want the hassle of bookkeeping and operate on small scale.

The progressive rate is widely used by those who have lots of proven expenses. It requires more effort as all expenses have to be confirmed by invoices and receipts, which then has to be kept and may require help from a professional accountant. However, using the progressive rate very often means less tax or no tax to pay at all. The key factor here is property’s depreciation write-offs, which is a significant deduction of the gross income.

All landlords who conduct business activity by renting out their properties have now the following tax options:

1. Reduced rate (same rates as individuals)
2. Progressive rate (same rates as individuals)
3. Flat tax – 19%, deductions possible
4. Tax card – the most simple way of taxation, which doesn’t require bookkeeping nor tax declarations. Tax is paid on gross income no matter of the income’s amount. Tax rates depends on type of business activity, number of employees and number of residents in the tax district

For those, who rent out their properties through company apart from property expenses mentioned above other expense connected with conducting business activities have been allowed to deduct, among them health insurance payment, which has been deducted directly from the tax (not gross income). The health insurance payment is currently a fixed amount for all companies, no matter what their income is.

What is the “New Polish Order” proposal for Landlords in terms of taxes?

According to the government proposal all private landlords in Poland starting from 2022  would have to use only reduced tax rate to calculate their rental income tax payments.  Rates would stay the same – 8.5% and 12% for the same brackets.

This means that there would be no deductions allowed and all landlords should end up paying taxes on rental income (to clarify real income i.e. amount of rent paid by the tenant)

Landlords conducting business activity would have 3 options: reduced rate, progressive rate and flat rate, tax card would be abolished. Here the government also proposes 2 important changes:

1. No depreciation write-offs for residential properties, even for those renting for business purposes partly or fully.
2. No health insurance payment deduction . Moreover, the way how this payment is calculated would also change – it would be dependent on income i.e. higher income higher payment. Businesses that generate a loss would pay based on the minimum wage.

The big question is if depreciation write-offs would be allowed to carry forward based on the rule of acquired rights and will apply only to new properties. The government’s proposal doesn’t answer that question.

The good news is that the government is planning to change the tax brackets to 17% on income up to 120k PLN and 32% on income above 120k PLN and increase tax free allowance to 30k.

What landlords should expect?

Summarising, government rental income tax proposal is that private landlords would pay tax at reduced rate of 8.5% or 12% only, where no tax deductions are allowed. Landlords renting through companies would be able to deduct expenses, but no longer make depreciation write-offs for residential properties and their cost of conducting business will go up because of the higher health insurance payment that would be dependent on income.

The “New Polish Order” has been widely discussed now, but we probably will not see big changes in the final version. Any changes are more likely to be cosmetic.

Therefore, private landlords operating in Poland should get ready to pay tax on their rental income starting next year. Those, who still want to take advantage on possible tax deductions should look into options of setting up business activity. Here it is crucial to run the numbers to see if it is worth it.  Taking into account the cost of conducting business activity in Poland it could turn out this is more expensive than paying the reduced rental income tax rate.

If you need help with managing your rental property in Poland and/or help with your Polish taxes please contact us.