Tax shield in business – what is worth knowing?

Tax shield in business – what is worth knowing?
Marek Cieślak

Marek Cieślak

CEO CGO Finance

The tax shield in business can bring you many benefits as an entrepreneur. What is its potential? How does it work and how to use it? Find all the answers and necessary information below.

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tax shield in business

Definition of an enterprise

An enterprise is an organizational unit engaged in economic activity. It is legally, organizationally, territorially, and economically distinguished. It includes human, financial, tangible and intangible resources. An enterprise can engage in commercial, service, or production activities. It has the legal capacity to perform legal acts, and its goal is to generate profits.

What does an enterprise include?Name of the enterprise
Ownership of real estate or movable property
Rights arising from lease and tenancy agreements for real estate or movable property, as well as rights to use real estate or movable property resulting from other legal relationships
Receivables, securities rights, and cash
Concessions, licenses, and permits
Patents and other industrial property rights
Copyrights and related property rights
Business secrets
Books and documents related to conducting business activities
Components of an enterprise

What is the tax shield?

It reduces income tax by financing businesses with external capital. This allows to include expenses related to external capital as tax-deductible expenses. It provides a legal and safe way to reduce tax burdens.

What expenses does it create?Operating lease installments
Leasing fees
interest on loan
amortisation write-offs on tangible assets
Expenses influencing the shield

Who can benefit from the tax shield?

The application of this shield depends on the taxation method of the company.

Who can benefit from it?Companies settling income tax under general rules (the tax scale or flat-rate tax).
Who cannot benefit from it?Companies settling income tax using a tax card.
Companies settling income tax under lump sum on registered income.
Tax shield depending on the taxation method.

Tax shield and leasing

Operating LeaseFinancial Lease
The cost includes the initial fee, and total monthly installments, with the possibility to deduct the added VAT from both the initial fee and monthly leasing installments.The possibility to deduct interest and depreciate the leased asset. The entire VAT amount must be paid once along with the initial fee.
Tax Shield and types of leasing
tax shield in business

Check the key tax limits and deadlines in 2024 in this article.

When is the tax shield profitable?

It is most commonly used in operating leases. The cost includes then an initial payment and monthly instalments calculated in total. In this case, you can also deduct the VAT added to the initial payment and lease instalment.

How to calculate the tax shield?

The following mathematical formula allows for calculating it:

C= (1-T) x E


C – actual cost including shield

T – income tax rate

E – company expenses

The value of the tax shield can also be calculated using special calculators, e.g.

VAT and amortisation in the context of the tax shield

VATThe amount of the tax shield depends on the method of VAT deduction from expenses incurred on a vehicle used in the company.
AmortisationThe impact on tax liabilities depends on the method and rate of amortisation, as well as the initial value of the fixed asset. The depreciation rate is determined based on the category of the fixed asset.
VAT and amortization

If you have more questions about this topic, our experts will help you with comprehensive advice. Feel free to contact our firm.

FAQ – Frequently Asked Questions About the Tax Shield in business

What is the tax shield in business?

It is a system providing tax relief or other benefits to entrepreneurs. Its goal is to increase the net income.

What are the main goals of the tax shield in business?

The main goal is to reduce the tax burden for specific groups of taxpayers. This can lead to increased investment and economic growth in certain economic sectors.

Who can benefit from the tax shield in business?

It is available to entrepreneurs settling income tax on general principles. It also concerns other taxpayers meeting certain criteria, such as income level or type of business.

What benefits can the tax shield bring to entrepreneurs?

It provides tax reliefs, lower tax rates, exemptions, or other forms of support. This leads to increased net profits for entrepreneurs.

Is using the tax shield in business always beneficial?

The benefits depend on the individual tax situation of an entrepreneur. It is worth consulting with a tax advisor to determine if it will be profitable.

Does the tax shield in business have a specific duration?

The duration may vary and is usually specified in the law or regulation introducing this form of tax support.

Is the tax shield in business available to all businesses?

It is available to businesses settling income tax on general principles.

Does using the tax shield in business come with any conditions?

Yes, it usually comes with conditions, which may include e.g. a specified method of conducting business, achieving a certain income level, etc.

How can I get more information about the tax shield in business?

For more information it is advisable to contact local tax offices, or tax advisors or to consult current tax legislation.

Featured expert

Marek Cieślak

CEO CGO Finance