Individual business owners in Poland face sudden jumps in tax liabilities that encourage them to halt growth just before crossing key thresholds, according to a new report published by the Tax Foundation in 2025. Administrative data reveals that firms cluster heavily just below thresholds for mandatory VAT registration and health contribution increases, with the bunching strongest at a PLN 200,000 (about EUR 46,510) revenue line where businesses must enter the value-added tax system. The report concludes that these "tax cliffs" distort business behavior across Poland's three separate income tax regimes for sole proprietors and partners, imposing economic costs whether owners limit real activity, split into multiple entities, or adjust how they report revenue.
The report documents that Poland's 2.67 million individually taxed businesses sort across three tax options: 46 percent use the progressive personal income tax scale, roughly one-third choose a turnover-based levy on gross revenue, and the remaining 20 percent select a 19 percent flat tax. A quarter of these firms report annual revenue below PLN 60,000 (EUR 14,000), far beneath the average Polish wage, while about half show revenue below PLN 160,000 (EUR 37,200). Micro-enterprises account for over 95 percent of all businesses operating in Poland. Under the turnover-based regime, the health insurance contribution stands as a fixed sum that steps upward with revenue: crossing PLN 60,000 raises the annual charge by nearly PLN 4,000 (EUR 930), while passing PLN 300,000 triggers an increase of roughly PLN 8,000 (EUR 1,860) applied to total annual revenue rather than just the amount above the line. A separate social security contribution threshold at PLN 120,000 creates its own cliff, with businesses losing access to the Mały ZUS Plus reduced-rate scheme and facing cost increases reaching as much as 290 percent for the lowest-income firms.
The authors write that Poland's sharpest tax cliffs—the VAT registration threshold and the lump-sum health contribution steps—"are also the most visible bunching locations, and both are in need of reform or abolition." The bunching effect appears across all three tax regimes, signaling that business owners channel time and effort into choosing and qualifying for the lowest-tax option with negative effects on revenue. The report states that at tax notches, crossing the line applies the higher charge to the entire base at once rather than only to income above the threshold, giving taxpayers a strong reason to stop just short. Poland's VAT threshold sits as the eighth highest among 32 European countries when adjusted for purchasing power, running two-thirds above the European average.
The report explains that bunching behavior carries two types of costs: economic losses as firms hold down real output or spend resources on avoidance such as retiming income, restructuring accounts, or underreporting, and fiscal losses as these maneuvers lower tax payments. Research across multiple countries finds firms splitting into smaller units, underreporting sales, and staying partly informal to dodge VAT registration, with the effect largest where tax administration is weak so the threshold hardens into a border between formal and informal economies. Even when the response involves reporting and timing rather than cutting real activity, these actions divert effort from production while eroding the tax base. The health contribution steps and social security rebate ceiling shift charges from one positive level to another without changing any administrative obligations, meaning the tax notch buys no administrative saving to offset its economic and fiscal cost.
The report recommends that Poland collapse the health and social security tax notches into flat rates, or at minimum smooth the steps into a continuous schedule, and lower its VAT registration threshold to the European average or below while simplifying the VAT base rather than raising the threshold further. A better way to cut compliance costs for small businesses would be to simplify the VAT itself by reducing exemptions and reduced rates, not to lift the registration line and exempt more firms. The authors note that small companies face a similar cliff where crossing EUR 2 million in revenue lifts the corporate income tax rate from 9 percent to 19 percent on all income, more than doubling liability and likely producing the same bunching behavior and associated costs.