Transition from Lump-Sum Taxation to Actual Expenses

Entrepreneurs who have opted for the taxation system based on actual revenues and lump-sum expenses may decide to change their taxation system if they determine that this system is no longer the most favorable for them. Below, you can read when and how the transition from lump-sum taxation to a standard sole proprietorship or a limited liability company (d.o.o.) can be carried out.

Determining the tax base by applying lump-sum expenses represents a simplified method of tax base calculation, as taxpayers are not required to keep records of actual expenses or costs incurred in the course of their business. Instead, expenses under the lump-sum system are fictitiously determined at 80% of total revenues, meaning that this portion of revenue is treated as expenses. Entrepreneurs who choose this taxation method do not need detailed tracking and documentation of costs, as these are predefined by statutory standards.

A taxpayer may determine the tax base using lump-sum expenses only if this method has been previously reported to the tax authority. In addition, the condition relating to the amount of business revenue in the previous tax year, calculated in accordance with accounting rules, must be met:

• For a part-time sole proprietor or a limited liability company (d.o.o.) without employees, annual revenues must not exceed EUR 50,000.
• For a full-time sole proprietor or a part-time sole proprietor or d.o.o. that employs at least one person full-time for a minimum of 5 months during the calendar year, annual revenues must not exceed EUR 100,000.

If these conditions are met, the taxpayer may choose lump-sum expenses as the method for determining the tax base.

The right to determine the tax base using lump-sum expenses is exercised by submitting the prescribed tax return form for personal income tax on income from business activities. The form must be submitted to the tax authority no later than 31 March of the current year for the previous year.

It is therefore deemed that the taxpayer has opted for determining the tax base using lump-sum expenses if, by 31 March of the year for which the tax base is being determined using lump-sum expenses, or by the deadline for submitting the personal income tax return on income from business activities, the taxpayer does not notify the tax authority of the termination of lump-sum taxation.

A lump-sum taxpayer who exceeds the revenue threshold in two consecutive tax years (exceeding the annual average of EUR 50,000 or EUR 100,000) is required, in the following tax year, to switch to determining the tax base based on actual revenues and expenses.