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Payments from a limited liability company may be subject to double taxation. The company, as a separate legal person, pays CIT on income, while shareholders generally also pay income tax, this time PIT, when remuneration is paid. However, some methods of paying money from the company optimise and reduce the effective burden. We present several of them.
Appointment as a board member or chair
A highly popular option is appointing a company shareholder as a remunerated management board member or chair, with remuneration determined by shareholders' resolution.
This can work well because remuneration paid under an appointment can be a tax-deductible company cost. For the appointee it is taxed under general progressive rules, but social insurance contributions are not required, except mandatory health insurance.
Appointment therefore carries lower contribution burdens than an employment contract, under which the board member must pay all associated ZUS contributions, not just health insurance.
Employment also has advantages, and current law does not prohibit combining employment and appointment for the same person, another option worth considering.
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Payments for recurring non-cash services (Article 178 of the Commercial Companies Code)
Another option is paying a shareholder under Article 176 of the Commercial Companies Code of 15 September 2000. It governs an obligation to provide recurring non-cash services. The company agreement must specify their type and scope. The resulting remuneration is not subject to ZUS contributions, including health insurance.
Specific-task contracts, potential 50% tax-deductible costs and student mandate contracts
Paying a shareholder under a specific-task contract with the company, or a mandate contract, is also relatively common. Remuneration under either can be a company tax cost.
The first can be especially efficient for people entitled to 50% tax-deductible costs connected with copyright transfer.
Mandate contracts, meanwhile, can benefit students and pupils under 26.
Dividends, especially under Estonian CIT and with a Family Foundation
Among common ways to pay a company owner, there is also distribution by dividend. A conventional dividend is not optimal regarding burdens, as the effective rate is relatively high.
It becomes worth considering when the company uses Estonian CIT. Under Estonian CIT, CIT is lower: 10% for small taxpayers and new businesses or 20% otherwise, and PIT due can be reduced by as much as 90% of the CIT paid by the company.
Dividends may also be highly efficient through a Family Foundation and paying some funds through it. Under current rules, Family Foundations may be exempt from income tax under certain conditions.
Rental contract
A less popular but very effective way to pay funds from a company is a rental contract. What does it involve, and why is it efficient? Here is how!
The company concludes a rental agreement for certain assets, such as property, with a shareholder or board member. This lets the company deduct rent. As the private landlord, the shareholder pays lump-sum tax of only 8.5% on rental revenue up to PLN 100,000, and tax of 12.5% on revenue above PLN 100,000. No health or other social insurance contributions are required.
Other ways to pay a shareholder optimally
Depending on the circumstances, other possible methods include:
- Remuneration under an employment contract;
- Remuneration under a B2B contract;
- Remuneration for a surety or bank guarantee;
- Interest under a loan agreement between company and shareholder;
- Travel allowances for a board member, due to the exemption under Article 21(1)(16) of the Personal Income Tax Act of 26 July 1991;
- Expenditure constituting representation costs.
If you found this article interesting, explore our HR and payroll services and read how we can help you:
Summary
Looking for ways to pay a limited liability company shareholder efficiently? Contact us today for comprehensive tax advice. Our certified specialists will use current rules, interpretations and your individual circumstances to identify tax savings.
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