In Poland, where I'm from, it's pretty much the norm to be self-employed in Poland in the IT sector.
I believe that around 50% of workers are technically contracted one-man companies, and this percentage is inversely correlated with the seniority level - the greater the earnings (and the sense of job security that goes along with expertise and experience), the greater the incentive.
Going B2B makes a substantial difference in terms of fiscal burdens. Other than that, your day-to-day work looks pretty much the same though. You're just sending monthly invoices to the same employer, typically a single one, sometimes for years on end.
This would be quite risky where I am from, for both the freelancer and the employer. Being self employed, but only for a single customer, is false self-employment. If you get caught, your employer has to pay taxes and social security contributions retroactively for up to 4 years, and afaik both the employer and the freelancer are liable for the money owed to the tax office and social securities. If you are caught doing this premeditated, it might be a criminal offence.
This is exactly what happens in Poland and everyone involved feels very smart for cheating the system. That's also why software from Poland is such a tacky crap despite so many "talents". The software professionals have no leverage to push back, they only can walk away. The irresistibile benefit is that one can write off buying a car into operating costs, so the dream of PREMIUM GERMAN CAR prevails over doing anything creative.
[citation needed]
How do you recognize "software from Poland" anyway?
Whatever is created in all these nearshoring and outsourcing centers in Warsaw, Kraków, and Wrocław. Currently mostly Azure, SAP, business Java and Angular.
Yeah, but how do you know which application was and which wasn't? Apart from some big customers, it usually isn't public knowledge. Eg. my previous project was a banking app for a rich Middle Eastern country. There's no "acknowledgements" section in the app.
My original question still stands - by what metrics do you regard "software from Poland" as "tacky crap"? I'm not being belligerent about it, but somewhat curious, sure.
Ain't gonna fight. Good luck.
I'm not fighting, I was just curious what you're basing your claim on. I disregarded your unnecessarily incendiary phrasing ("software from Poland is such a tacky crap") completely.
Software from all of Eastern Europe and ex-USSR is lower quality than American and Western European. Source: live in ex-USSR. We all hired to deliver shitty code for low cost. Not as shitty as Indian, but you get what you pay for.
Here is another mistake, some weird superiority. For the HQ in London, Munich, San Francisco, or Zurich, they are all in the same outsourcing low cost league as Bangajabad. It completery doesn't matter for them whether AI in Java and Kubernetes on Azure is bloated 2 or 3 times too much. Occasionally show them some low quality codebase from India to stroke their egos "you see that's why we keep the office in Novowsky".
In my experience, the software can be crap because the companies tend to only hire technical people over here in Poland, while business guys remain in the HQ. The highest business person you'll see in Poland is typically a PO, while a PM and people above him are in the headquaters. This has the effect of not keeping the Polish team tightly in the loop, which translates into worse software.
The second problem is that the companies tend to hire a lot of people at the same time when they open their offshore/nearshore center in Poland - often going from zero to hundreds, or even thousands over the span of just a couple of years. Having such large organization of effectively people with no previous institutional history is akin to a herd of only young elephants, who don't have any elders and don't know what and how they should be doing exactly. The "elders" are in the HQ obviously, but building company culture exclusively over Zoom, especially on the scale of hundreds/thousands new hires, is a bad idea.
This isn't a mistake or overlook. They treat the office like a sweatshop. No you are not exceptionally skillful. Within weeks they're able to move to a cheaper location and they will once their Excel will say so. It's so funny seeing devs on B2B in Poland thinking they are some entrepreneurs while for HQ they are in the same league as another office in Pajarumbad.
They don’t move to cheaper locations though, because the work quality would suffer. So far, I’ve only seen one group of people laid off in Poland and their jobs moved to India - DB admins. The company deemed the job simple enough to risk moving it to an outsourced Indian sweatshop. The results were terrible BTW.
Also, your experience is very different than mine, I’ve never meet anyone working in Poland doing coding for a company abroad thinking they’re some kind of entrepreneur. They’re not delusional, they know that they’re just doing a job, selling themselves to a highest bidder like everybody else.
some of the best eu engineers I’ve worked with were polish freelancers
Azure and SAP are crap everywhere.
How is tax optimization related to the quality of developed software?
If you have to breach rules which are a standard in developed countries, means exactly that you are uncompetitive with your skills. Funny that social and salary dumping where exactly the populist argument that the British voters picked up most eagerly in referendum on Brexit. That's post-Communist mentality to feel satisfaction from "screwing someone over", it's devastating the social trust, on macro scale it doesn't pay well.
I still don't see how developing high quality software is related to one's personal viewpoint on taxes.
That's very smart.
You don't have to breach any rules. Every job offer I've ever had in Poland had an option for regular contract of employment ("umowa o pracę"). If you want to be taxed more, that option is always on the table.
You're dealing with some low end companies if german car is somehow a status symbol.
This doesn't even offend me. Good luck with your sweatshop.
Anecdotal, but developers from Poland (and Russia too) have been among the best contractors I've seen. Even the digital tracking / documents system from the government, which is usually a pile of crap in most countries, is pretty well done.
I've had terrible experiences with Hungary, Latvia, etc. and (judging from conversations to the owners of the outsourcing agencies) Hungary has very high taxes and not many smart ways of avoiding them.
If you're from a country like Germany, most of what you're skipping financially is the insurance cost that's covered by the employer (social security etc.) Which means you don't have access to the social safety in case you need it.
If you earn enough, the savings can easily surpass the risk for a singular person.
It's worse for society overall, but let's not pretend the high earners don't mostly subsidize the safety net.
The IT sector in Poland (again) is a booming one, and most of the services are effectively exported, as we're talking outsourcing.
I guess it translates into the lack of political will to curb the practice, too, as the government would risk that self-employed programmers (and whatnot) may not fall in line, but mostly log out of the system instead, registering their companies abroad, for example. I guess the government isn't eager to start this cat-and-mouse game, preferring a smaller slice of a bigger pie.
There are even some extra incentives on the top of the flat income tax rate (which is an option for all one-man companies, regardless of the sector)...
Like the "IP Box" tax relief, which drives the income tax rate from the regular 19% all the way down to 5%, as long as you get your services classified as "research and development". It takes some patience and loads of legal paperwork, which you obviously have to pay for (the latter, that is), but it's well worth it in the end.
In developed countries IP means submitting patents and real research which build the company's position on the market. That's why they have strong companies and brands. The Polish "IP box" is creating and submitting PDFs with git diffs of Java and TypeScript written for these companies. Just remember to remove passwords and secrets from them, guys.
Not all intellectual property is patented. Anyhow, you don't include git diffs. You cannot, even if you wanted to - the code is not your property. The whole point is that you're selling your intellectual property rights. It also means that the tax office pretty much has to rely on your word that the work is innovative in nature. Obviously they'd be in no position to tell the difference anyway.
"Registering" the business only is a trap and a way to pay much much more _when_ the tax office decides you are avoiding taxes. To truly do that, you need to move your center of life abroad, which generally means being outside Poland for 183 days a year.
I agree that it mostly is the case, as I still pay few times more taxes (and VAT on consumption...) than average citizen, even when using 12% lump sum tax.
Yeah, theoretically. But at least within the Schengen area, that's pretty difficult to prove/disprove, especially if you've got no family. I'm working remotely, I'm renting a cheap room in Budějovice, here's the tenancy agreement. Come see if my toothbrush is wet :)
In Poland(since I'm also from here), biggest chunk of savings when working as self-employed is income tax and mandatory public retiremend fund. Most Software Engineers go B2B/self-employment route because not only taxes are lower, but savings from paying minimal public retirement are pretty big with higher salaries. We're at a point where most people in Poland do not believe in retirement system anymore, it's unsustainable and will crash or will be kept with social, minimal retirement, no matter what you paid in. That's why most of us want to save on the side, put that into ETFs or housing rather than count on the government, especially that over last decade or so almost destroyed this country.
Exactly. Only 3% of millennials believe that state pension system will allow them to survive.
https://forsal.pl/artykuly/1415939,srokowski-tylko-3-proc-mi...
sure that the case in lot of countries but is something really wrong with idea to have 2+ clients as minimum because reason why work done in that way is because person doing it don't wanna agree on terms that 'employment' contract is required and if that 'single' client is gone he always can get another one in few months. Sometimes you work with few clients in single year but sometimes it just one for 2-3y. And worth part that in some places taxes on self-employment might be higher.
Similiar laws are in Poland, except they're not really enforced.
It's really rare that the tax office would prove a company exists solely for tax optimization. The risk virtually drops to zero if one freelances after the hours and has legitimate invoices with other companies.
This often causes mismatch between Polish employees who wish to work remotely abroad, and for ex. employeers from the DACH region, where I've heard the laws are strictly enforced. One party claims there is no risk, and the other claims it's too risky :-) (taking other factors aside, such as employee protection, etc.)
This risk does exist in Poland, but among the criteria for "false self-employment" is being expected to work within fixed hours, and in a location specified by the employer.
As IT workers - even those who've got contracts of employment - typically do flexible hours, and pretty often work from home (or otherwise remotely), it doesn't really apply.
That's for tax reasons only though, technically it is just another form of long term employment. As soon as you have multiple customers that you send invoices to with some regularity and you have autonomy would you pass the 'self employed' test in other countries. If you refer to them as your client and you only have one then you're technically an employee, if you refer to your contact at your client as 'your boss' then you also are an employee.
We have a lot of this in NL as well, the long term effect is the slow erosion of the social safety net. Because good luck if your client decides they no longer need your services, suddenly you find out what the downside of being self employed is. Nothing to fall back on. So save like your life depends on it.
I can't see why a company couldn't have one long-term customer. It's not unusual eg. in the building sector (where large construction projects, not unlike software projects, can take years to complete).
Another common example is MDs - quite a lot of private doctor's offices are contracted by the National Health Fund, basically providing their services for the public healthcare that way.
Clearly having multiple customers isn't a reasonable requirement for a small company. Software engineering isn't like private residential plumbing - "sink drain unclogged, next please!" :)
> good luck if your client decides they no longer need your services, suddenly you find out what the downside of being self employed is.
That goes without saying, and the same obviously applies if you're running a "regular" company, with employees, like a restaurant or whatever.
The risk is arguably even greater, as you will usually pile up some financial obligations (such as credits) and other commodities limiting your financial fluidity (remember Covid? Restaurant owners do).
By the way, you can insure yourself against loss of income. Many insurance companies offer this service.
Let's hope you won't find out why that's a very bad idea.
On the contrary, it's a must.
That's a strawman.
Sorry, but if you have just one customer and you're developing software other than taxes and your rights you are less than an employee. Don't kid yourself, that tends to lead to rude awakenings. If at the end of the year you've only sent invoices to a single customer then you are simply at risk. You need multiple customers to be stable and secure. Two is better than one and three is really the minimum.
Loss of income insurance is to take care of mishaps, not to insure against market downturns or other normal risks that a business is exposed to.
sounds like you simply really don’t like freelancers. you know no one stops you from accumulating reserves in your company or in general, right?
You're funny. I've been self employed for the last 30+ years and I really enjoy it. But I know the risks and I'm making sure I don't get burned because having only one customer is just setting yourself up for various kinds of failure.
I love freelancers and I love freelancing. But I know the difference between being a freelancer and running a company and being an employee in all but name and you really don't ever want to be in that position.
the way not to get burned is to charge high enough with trustworthy clients, take some insurances and to be aware of your pension provisions that will vary by country. whether you have 1 or 3 clients at one point in time is immaterial as long as it doesn't sour your relationship with your clients
I appreciate that it sounds like you had a bad experience with a client though.
That helps. What helps even more is to have a nice fat savings account that allows you to negotiate properly, to weather the inevitable dry spells, to build a solid base of clients that value you and that will repeatedly hire you.
Against what? 90%+ of the freelancers are not even insured against loss of income from health related issues. The remainder is well off enough that they can probably afford to take the risk.
Until: that one client goes bust, there is a 'policy change', the project/product you are working on gets axed, the economy burps, your main contact at the company gets fired and the new guy or girl doesn't like you and so on.
I appreciate that it sounds like you haven't had a bad experience yet, but that makes you simply less experienced. Give it some time and you'll see all of the above and variations on those themes.
Here is a 2011 booklet I wrote on the subject.
https://jacquesmattheij.com/be-consultant/
as I already mentioned having reserves is indeed very important
in my jurisdiction there are for example some excellent guaranteed income insurances covering various situations. they won't pay forever, but they'll pay. income replacement due to health issues is covered by normal social welfare in my jurisdiction as well
all of those things you mentioned happen regularly to employees. they are harder to let go, sure, but employers have a lot more leeway to make your job hellish enough to force a resignation, or if the economy is really bad overall they can throw their hands up and say we're cutting divisions of the business with no objections from the law in most places. sure you can go to your work council (hope they are on your side) about it, or to the union (hope they have time for you and you're lucky enough to have enough evidence to win the tribunal) or the lawyer (hope you have a legal assistance insurance and are ready for years of process and fees). employees without a savings buffer are similarly vulnerable in these circumstances
the biggest reason to stay an employee if you can consult instead where I am is really the unemployment benefits you can get, but that now takes up to 10 months to actually start paying out due to how understaffed the government is. so again, best have some reserves. the next biggest reason is you hate paperwork
The point isn't that they doesn't like freelancers, but doesn't like how the employers misuse that to get workers without rights. "Oh, you're not employed here, so we don't have to follow labor laws, we can just terminate the contract".
If I'm not mistaken, in the US employees can also be fired just like that. Meanwhile my contract specifies a month notice for both sides.
And that was their preference. I'm totally fine with being fired; that flexibility is also part of what I sell. It's why they pay me more than they pay employees.
the worker rights issue is mostly a concern for blue collar workers that are forced to become freelance by some companies to save on welfare costs. that is what tax authorities actually look for when they talk about "false self-employment" and that is why it is the company giving the assignment that gets punished in these situations and usually not the freelancer.
that's not really a concern for high billing consulting professionals. it is a common misunderstanding (as you can see from comments here) though and is variously used by companies to undercompensate people who could be far more profitable consulting
I have multiple customers over time; 3 years ago, I worked on a different project, for a different client, than I do now. But with the kind of projects I work on, it's hard to do several of these projects at once, and they're too long to do several in a year. Expecting self-employed contractors to have multiple clients is unreasonable.
As for job security, employment doesn't give a shred more job security than being a self-employed contractor these days. My job security comes from my skills and the succession of successful projects I've worked on.
And there are a lot of companies that have a single large customer. I think I have a lot more flexibility than they do.
So please be very careful and if you can find a side gig that doesn't interfere with your main one so you have at least some protection. It could be a low hours but high pay job that way you don't end up eating into your time too much, for instance a coaching job.
On the contrary: it's a must. Without multiple clients you are super fragile, don't have a strong negotiation position and in case of any kind of headwind you're immediately on the ropes. If you insist on doing long running contracts try getting two that do not overlap in terms of run-time, make one two days a week, the other two days a week or three days a week and bill the smaller job a higher rate.
That's true, but they tend to have a much stronger position than you do due to the kind of contracts that get written between large entities. In a conflict with a much larger entity you usually end up drawing the short stick. They could stiff you on a bill and it would already pull you under water.
Protection from what exactly?
Not at all. I can walk away and I have my financial reserves. My negotiation position is stronger than when I'm an employee.
This sounds like an absolutely terrible idea. I'm not going to undermine myself like that.
One (very small) client did stiff me on a bill. I won't work for them anymore, and I tend to prefer larger clients now that simply do pay their bills. I have considered suing them, but the amount was too small to be worth it. It didn't pull me under water.
Ok, never mind me then. Best of luck with the career!
> > I can't see why a company couldn't have one long-term customer.
> Let's hope you won't find out why that's a very bad idea.
The way you phrased it feels needlessly patronizing (perhaps unintentionally), but more importantly, it does not really address my comment.
I wasn't arguing if it is a good idea or not. I was responding to the argument that having multiple customers is necessary to be regarded as "truly" self-employed in the eyes of the taxman. My point is that it's not uncommon nor unusual for a small company to be invoicing only a single customer. Hence my examples. Whether it is safe business-wise is another story.
> If at the end of the year you've only sent invoices to a single customer then you are simply at risk. You need multiple customers to be stable and secure. Two is better than one and three is really the minimum.
Noone denies that having diversified sources of income is (other things being equal) the safer option. But the subject was legal recognition, not optimal business strategies.
It may come across as patronizing because that's roughly how I see this. I'm at the end of my career after a very productive stint and have absolutely nothing to lose by letting you have the benefit of my experience to date, which spans a couple of continents, six countries and a substantial amount of money. Whether you are open to that kind of experience backed input is entirely up to you, I have no upside here, but you do and you also have a possible downside. But: when I was 27 or so I might have still seen things your way so maybe in 30 years you'll be telling someone else the same things. I sincerely hope that you will never find the true measure of how important those things are and if I could give my younger self some advice that would be it.
As for legal recognition: the only reason this is a thing right now is because the social contract is broken, in any other setting you'd be an employee.
What rude awakening? The situation is exactly the same as losing a job: you are now jobless and need to find the next one. The "safety net" for a high earning individual does not exist anyway.
This is definitely a source of friction with the tax service.
A couple of years ago, the Dutch tax service was trying to tackle the problem of fake self-employed people who were really just employees without the same rights, pensions, etc. The Dutch postal service PostNL was notorious for firing firing all their mail deliverers and hiring them back as self-employed people who still had to wear their uniform and work according to their schedule. And somehow the tax service approved that. But self-employed programmers who hop between big projects, negotiate their own pay (which tends to the high side) and have a lot of control over the projects they work on and the way they work on them, suddenly have to prove that they're really "zelfstandig", self-sufficient.
It's frustrating. I recently went back to regular employment and I hated it. Tons of extra rules, limited vacation days, and significantly lower pay. I guess I prefer being in control, saving for my own retirement, and going on vacation as often or as little as I like. Seriously, how many vacation days I had left used to give me stress. It's significantly healthier for me to be self-employed.
The way I see it: if a large company can have a single client and just rent out all their employees to that single company, why can't a small one-man company do the same?
And I think I'm a lot more self-sufficient than that company; if my contract ends, I can easily get a new contract elsewhere for myself. But if their contract ends, they need to find new work for all of their employees at once, and they'll likely fire some or all of them, making the whole job security argument moot. Their risk is higher than mine, and their security isn't. I really think having lots of self-employed contractors like me is better for the industry than the overhead of having to organise into companies.
In Poland the government is in on it when it comes to specialists of any kind, as this is how they prevent people from emigrating to the west or "emigrating" (tax-wise only) to the Czech Republic, which offers a similar deal.
For a while it was possible to have a flat 5% income tax rate, but I guess someone pointed out that it's too generous, so the best option now is a flat 12% and 3% healthcare contributions.
In the US, I am not familiar with insurance for loss of income due to simply not being able to sell products/services. Usually, the loss of income has to be a result of covered natural disasters, vandalism, legal issues, etc. Most business insurance policies even specifically exclude pandemics, as many found out recently.
If you're not jumping around contracts regularly every 2 years in NL and are not billing the approximate annual wage for your role every year (assuming that you work the 40-44 weeks) then you're an employee and shouldn't be contracting.
The market now is interesting - there are a huge number of low experience / low skill people flooding the market which has driven prices down for some very good people whilst also making it hard for companies to actually find qualified people. It actually lead to me rejecting a project who really wanted me and I fancied (Government but with a chance to have a really big positive impact on society; I moved mountains with the last project and learned some valuable lessons, seemed a shame to let that dull... oh well).
I've been doing it for about 8 years now, I enjoy it and it has allowed me to both grow like crazy and do things I've always been capable of but wouldn't have attempted as an employee.
The other thing: funding in Europe for ventures is horrible compared to the US. I'll be looking to raise for a project this year and I'm dreading it (Healthcare, we're going to try the public route first because it would be better long term.. although it will leave money on the table it will increase the probability of success we believe).
You should be billing a multiple of the approximate annual wage to offset the risks of freelancing. Twice is good, three times is better. If you can't do that you're much better and safer off to find employment so make sure you understand exactly what the risk/reward trade-off is for being a freelancer and set yourself up accordingly.
Find customers that value you and make sure they pay and pay on time. A single hickup in the payment department is a good reason to start looking for a replacement customer. And never ever rely on just the one customer: your negotiation position is now crap and if anything happens to that one customer, their customers, their market or the relationship then you're done.
If and when you are looking for funding for your healthcare start-up please contact me, I may not be able to invest myself but I do have a whole pile of contacts and some of those are doing regular medical investments.
You don't seem to understand that using B2B contacts for work is something different than freelancing.
My home country also regulates this scenario - one-man companies with ~single client - for businesses strongly. This is hidden employment. How would it be beneficial to anyone?
- the subcontractor doesn't get any social security. Has to provide everything for himself from the private sector. And pensions (however meager). Theoretically he's free to have multiple clients or vary prices but I guess for most this is a pipe dream and they are dependent. For some tax dodging he gives up the whole legal safety net of being employed. Based on your contract you are freely exchangeable.
- the contracting company has more freedoms with getting/tossing employees, although loses a safety net of subcontractor suddenly leaving or changing prices.
- the government loses oversight of actual corporate structures.
Instead of fixing the flaws in the social system, hidden employment just throws it in the bin because haha less taxes, more money and freedom.
Most programmers provide outsourcing services for companies from abroad (including outside of the EU).
Low taxes help them - and the umbrella companies AKA software houses - to remain competitive on the global market.
So even if they only pay a smaller fraction of their income to the budget, it's still better than if they didn't get the gig to begin with, because the contracts would go elsewhere.
You do get healthcare insurance in Poland; no difference here. You're paying those fees just the same way.
You're only required to pay minimum pension charges though, so you have to take care of that yourself. (Objectively speaking, investing your savings in the pension system, of all places, probably isn't an optimal strategy anyway. At any rate, noone stops you from paying more than you're legally required, if you think that it is).
It's obviously a trade-off. Being able to let people go without fuss if a customer downscales their budget (I was on the receiving end of this last year) is a competitive advantage.
What do you mean by that?
My point is that this is a very wrong direction for any country but especially eastern europe. It's like: welfare/health care system is bad, taxes are not used well. Top earning knowledge workers want an exit hatch, let's cater for them and they can hop off the welfare tax system. This way they can also provide cheap prices to foreign companies.
So many problems. These are just top off my head:
- Countries should want internally organised production, strong companies with own IP, not one-man "companies" producing IP to external entities.
- Those foreign companies will switch to other countries with better prices (Asia, Africa) any time if their programming scene improves. It's not like they have stakes like when building a factory.
- Lot of people think they can invest better, create a better future pension for themselves. This is often true, and why would we want to allow exits, further eroding the whole system? There should be a base pension fund with everyone involved.
To the government the company could be a 5 person shell, while it actually employs/pays salaries of 100s of families. Theoretically you could roll up the contracts, but that would be very complicated.
I agree that it's problematic, however:
There's a widespread lack of trust in the Polish government, which decreased even further during the 2015-2023 period. If the money is being funelled to the ruling politicians' families and friends, why willingly pay high taxes? I believe this is an underlying core issue, which would probably take a new generation to repair.
I'm not sure if there had been any unprecented drop in the trust level between 2015 and 2023 (meaning under the Law and Justice government).
While it is true that it's relatively low in Poland in general... Eg. according to this survey [1], the percentage of respondents expressing trust in the government decreased from 38% in 2016 down to 32% in 2022 (while clearly exceeding 40% about half way through).
Which is pretty normal whenever the same party stays at power for a longer period; its popularity wears out over time.
For comparison, the same score was at 39% back in 2012, midway through the term of the government preceding Law and Justice. Hardly a striking contrast.
I'm even less sure about your claim when it comes to the context of welfare systems in particular.
Social transfers and safety net is one of the very few areas where the Law and Justice government achieved substantial results, even though it had to steer the country through the hardships of the pandemics.
For example, in terms of the percentage of children at risk of poverty and social exclusion Poland ranked 14th in the EU back in 2015 [2]. By 2022, it ranked 6th [3].
Also look at [4], [5], [6]...
I am putting aside the infamous judiciary reforms, abortion, and other hot button areas (which are far less of a priority for an average voter than echo chamber—commentators tend to assume). I'm focusing on the taxing & welfare, and sheer facts.
[1] https://www.cbos.pl/SPISKOM.POL/2022/K_037_22.PDF
[2] https://ec.europa.eu/eurostat/web/products-eurostat-news/-/E...
[3] https://ec.europa.eu/eurostat/statistics-explained/index.php...
[4] https://notesfrompoland.com/2022/11/10/poland-has-eus-second...
[5] https://notesfrompoland.com/2023/06/20/poland-has-eus-third-...
[6] https://www.statista.com/statistics/1130472/poland-poverty-r...
Thanks for the links! I'll read them :)
> - Countries should want internally organised production, strong companies with own IP, not one-man "companies" producing IP to external entities.
Of course it's great to have domestic tech giants (and, sadly, Europe as a whole isn't doing very well in this regard, for reasons that deserve a separate conversation), but these things are largely orthogonal to eachother.
There is no reason why a domestic tech giant couldn't have local talents on contracts. Promising domestic start-ups, such as Tidio (mentioning them as they're from my home city) are doing that too.
> - Those foreign companies will switch to other countries with better prices (Asia, Africa) any time if their programming scene improves
Sure, but having people on employment contracts isn't going to protect you against it.
> Lot of people think they can invest better, create a better future pension for themselves. This is often true, and why would we want to allow exits, further eroding the whole system? There should be a base pension fund with everyone involved.
And there is. I can't see why preventing people from investing into a better future pension for themselves (on the top of the state-provided minimum) would be a good idea.
> To the government the company could be a 5 person shell, while it actually employs/pays salaries of 100s of families. Theoretically you could roll up the contracts, but that would be very complicated.
The government has got a centralized system, National System of E-Invoices (or KSeF). It's a fairly fresh thing, but it's becoming obligatory this year. Meaning the taxman gets to see all the invoices without having to jump through any hoops. So even if you are contracting (instead of hiring) a hundred people, it is still transparent.
What benefit does that provide? Some commenters are saying it reduces taxes. Why would it reduce taxes? Why would the government reduce taxes for people who jump through these hoops?
Taxes.
Standard tax rate (on UoP) is 12% up to ~30k USD, the rest is taxed 32%. On top of that, the employer pays a social security fee, its rate rises proportionally to income.
As an one-person business, you have two most popular options:
- 12% flat tax rate on income, with a flat rate social security fee; (1)
- 19% flat tax rate on revenue. The social security fee is dependant on income, but it's less than on UoP. You can write off expenses in this scenario, so the actual tax rate is actually lower. People generally try to write off as much as they can - for example, the tax agency is OK with programmers buying multiple bikes as a means of "transport to clients" ;)
You can also write off VAT in both scenarios, effectively making a lot of major purchases (desks, chairs, phones, etc) way cheaper. There's also a 5% tax rate, called IP Box, but it's tricky and doesn't apply for every scenario, so I'm taking this aside.
With the employer spending 5k EUR per month (21,7k PLN), you're left with:
- 14,6k PLN on UoP
- 18,5k PLN on 12% tax
- 16,7k PLN on 19% tax, out of which you can potentially recover 3,9k PLN
It's easy to see why software developers choose to start a one-person business. It's worth to jump through the hoops to save on taxes.
(1) There are actually 3 levels dependant on income, but it's lower than the UoP fee for basically most software developers
Why would the government design it like this? Do they want to encourage this type of thing? What benefit does encouraging this provide to society?
The US doesn't do this. They try to make self employed vs employed by a company have the same tax rates.
Good questions, no clue. The answer probably lies somewhere between a "badly designed tax system" and "stimulating growth of the IT sector".
Because they need to keep some gaps in the tax law to allow their friends to pay less taxes than normal people.
The US famously had a huge amount of tax law exemption just because of corruption. Nowadays you need an international setup to achieve the same, because the same old tricks have been used by many and there was enough political pressure to change it.
Some countries simply just didn't go through enough scandals of finding out how all well networked people pay almost zero taxes and therefore still have some relatively simple setups to pay little taxes.
A separate matter is countries trying to desperately attracting businesses and creating tax benefits only for wealthy expats, but not for their own people.
In the UK this was normal for IT (and other) contractors because there were tax advantages to the employer and to the employee/contractor. The employer could avoid paying National Insurance (social security) taxes of 10% as well as pension and sick pay contributions. The employee could pay themselves a small salary - enough to get social security benefits but be in the lowest or no-tax band and pay the rest as dividends from their limited company where tax was paid at a lower rate than income tax.
It was a good wheeze but some years ago the govt bought in legislation "IR35" which basically says that if it looks like a employment contract then it should be taxed like a "normal" employment contract.