Poland Borrows an Idea from Estonia’s Tax System, but Misses the Point

Poland has taken the Estonian approach to business taxation and decided to implement a reform that, in the end, looks almost nothing like the Estonian system.

This past weekend, the Polish government adopted new tax rules for small businesses that will apply beginning in 2021. Like the Estonian system, the new Polish rules allow businesses to only be taxed on their income when it is distributed to shareholders. However, unlike the Estonian system, the Polish rules only apply to business with revenues below 100 million PLN (US $27 million).

Limiting the reform only to businesses below the revenue threshold creates a new distortion in the Polish tax system. While some small businesses will likely benefit from the new rules, companies that are close to the revenue threshold will face new uncertainty. In fact, some small businesses will have to plan their tax affairs both under the small business rules and by those that apply for larger companies if their revenue expectations are close to the 100 million PLN cutoff.

The threshold could also drive some businesses to take advantage of the system by misreporting revenues to stay below the threshold.

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