Are you establishing a civil partnership? Be sure to report the selected form of taxation to the tax office!

Service-Tax

Before starting a business, natural persons must declare the choice of the form of taxation with income tax. On the other hand, entrepreneurs who already conduct business can change the form of taxation every year by January 20 by submitting an appropriate notification to the Tax Office. If, however, they fail to submit such notification, it means that for the next tax year they will be subject to the same form of taxation as before. It should be remembered that during the tax year it is not possible to change the form of taxation, except when the taxpayer loses the right to settle the tax in the current form.

Available forms of taxation

There are four basic forms of taxation for natural persons conducting business activity:

  • tax scale - general rules (18% and 32%),
  • flat tax (19%),
  • lump sum on recorded revenues (3%, 5.5%, 8.5%, 17%, 20%),
  • tax card.

The chosen form of taxation applies to all revenues generated from a given activity.

Additional activity and the form of taxation

It often happens that entrepreneurs running a sole proprietorship also decide to establish, for example, a civil partnership. This means that the taxpayer runs his own business and is also a partner in a civil law partnership. Thus, the taxpayer may simultaneously conduct activities in various forms, e.g. as part of individual activities, he may run a shop, while as a civil partnership in which he will be a partner, he may conduct activities in the field of providing design services. Basically, the entrepreneur obtains revenues from both of these sources - in which case should he tax them? Is it necessary, in the given case of additional establishment of a civil law partnership, to re-declare the choice of the form of taxation?

As a rule, the method of taxing income from a given activity is usually the same for all its forms. Therefore, both income from individual activity and income from a civil law partnership should be taxed in the same form, e.g. with a flat tax, or according to the scale. This could, therefore, mean that there is no need to additionally report to the tax office the choice of the form of taxation for revenues obtained as part of the activity of the same person, but conducted in the form of a civil partnership. However, as indicated by the last judgment of the Supreme Administrative Court, the case is not so obvious and uncomplicated. In the judgment of August 21, 2013 (file no. II FSK 2453/11), the Supreme Administrative Court ruled that an entrepreneur, when establishing a civil partnership, should notify the Tax Office of the choice of the form of taxation of revenues generated under this form of activity. As it turned out, it is irrelevant that individual activity, for which this form was chosen, was conducted prior to the establishment of the company.

In the case at hand, a taxpayer conducting an individual business activity taxed in the form of a lump sum additionally established a civil partnership. It found that revenues generated within a civil law partnership, also, as in the case of individual activities, may be taxed with a registered lump sum.

According to the court's judgment, by establishing a civil partnership, the taxpayer de facto commenced business activity in a new form during the tax year. Therefore, he was obliged to declare the form of taxation for the revenues obtained on this account. In the judgment of the Supreme Administrative Court, it indicated that “a taxpayer starting business within the meaning of Article 9 par. 1 u.z.p.d. Therefore, it will be both the one who in the preceding year did not obtain revenues from independent business activity or from activities in the form of a civil and general partnership of natural persons, as well as the one who conducted business activity independently in the year preceding the tax year and obtained revenues from the company established in the same year or in the preceding year, he obtained revenues from participation in such a company, and during the tax year he obtained revenues from business activities conducted in person ”. Therefore, the Supreme Administrative Court decided that the declaration on the choice of the form of taxation for revenues obtained from the activities of a civil partnership should be submitted separately, irrespective of the declaration concerning revenues from individual activities. Failure to submit such a declaration within the meaning of the court resulted in the necessity to tax the revenues obtained from the company's operations on general principles, i.e. according to the tax scale.

To sum up, a taxpayer starting business as a civil partnership is obliged to inform the relevant Tax Office about the selected form of taxation, also when he already conducts individual activity and decides to tax revenues from a civil partnership on the same principles. In the event of failure to inform the Tax Office of the chosen form, general rules will apply.