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The Polish Deal increased the public-law burdens on many people. Not only entrepreneurs pay higher taxes and feel the changes in health insurance contributions. The tax reform also affected management board members of limited liability and joint-stock companies, who must pay health insurance contributions on their remuneration from the new year. Can this contribution be avoided? We offer some guidance below.
Benefits provided by a shareholder to the company
Under the Commercial Companies Code, a management board member who is also a company shareholder, or indeed any shareholder, may provide specified benefits to the company for remuneration. Article 176 of the Commercial Companies Code sets out the detailed rules:
- a shareholder may be obliged to provide recurring non-monetary benefits to the company;
- the company's articles must specify the type and scope of these benefits;
- the company must pay the shareholder for them even if the financial statements show no profit;
- the remuneration may not exceed market prices or rates.
An amendment to the articles is necessary
The most important rule in Article 176 of the Commercial Companies Code is that the company's articles should specify the type and scope of the shareholder's non-monetary benefits, and that they are recurring rather than one-off.
If the company's articles do not specify that a shareholder is obliged to provide recurring benefits to it, they should be amended.
The articles should specify exactly which activities or services the shareholder must provide, such as advice in a particular area, company marketing or recruiting employees. The more potential shareholder duties they set out, the less often they will need amendment. It is therefore worth specifying a broad scope of duties in the articles and, for example, clarifying them in a shareholders' meeting resolution.
In my view, it is important that a shareholder who is also a board member should not provide the company with management activities that board members perform under the Commercial Companies Code. Otherwise, tax authorities and particularly ZUS may regard such arrangements as artificial.
How to determine remuneration
A shareholder's remuneration for recurring benefits to the company should be set on market terms. This is crucial for transfer pricing and the obligation to set prices or remuneration between related entities according to the arm's-length principle.
Importantly, the articles themselves need not specify the amount of remuneration, only that it will be paid. As a rule, the provisions do not even require a shareholders' resolution setting the amount, although that is what usually happens in practice.
It is worth avoiding additional agreements between the company and the shareholder, such as cooperation or service agreements. These could create a risk that authorities treat the income as income from a mandate contract or business activity, bringing different tax rules and, above all, social insurance contributions on the shareholder's remuneration.
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Taxation of remuneration
Remuneration paid to a shareholder for recurring benefits under the articles constitutes income from other sources.
Under Article 20(1) of the PIT Act, income from other sources includes in particular: amounts paid after the death of a member of an open pension fund to a person they designated or an immediate family member under the provisions on the organisation and operation of pension funds; amounts obtained as refunds from an individual retirement security account and withdrawals from such an account, including payments to a person entitled on the saver's death; cash social insurance benefits; maintenance payments; scholarships; benefits under a harvest assistance agreement; grants (subsidies) other than those listed in Article 14; supplements; prizes; and other free benefits not included in income under Articles 12–14 and 17.
The category of income from other sources is broad. Remuneration for benefits provided by a shareholder under the company's articles cannot be attributed to any other specific source of income under the PIT Act. It should therefore be classified as income from other sources.
Individual rulings confirm this. For example, in a letter of 25 November 2020, no. 0112-KDIL2-1.4011.803.2020.1.MKA, the Director of National Tax Information stated:
Therefore, the remuneration received by a Company shareholder for recurring non-monetary benefits to the Company constitutes income from “other sources” under Article 20(1) of the Personal Income Tax Act. When the Company pays remuneration to a shareholder for recurring in-kind benefits to the Company, giving rise to income from other sources under Article 10(1)(9) in conjunction with Article 20(1) of that Act, the Applicant has no obligation to collect personal income tax advances.
What about ZUS and health insurance contributions?
Under Article 6(1)(5) of the Social Insurance System Act (ZUS), natural persons carrying out non-agricultural business activity in Poland and persons cooperating with them are compulsorily covered by pension and disability insurance.
A person conducting non-agricultural activity includes a shareholder in a single-member limited liability company, and partners in a general partnership, limited partnership or professional partnership (Article 8(6)(4) of the ZUS Act).
According to those provisions, only a shareholder in a single-member limited liability company is considered a person carrying out non-agricultural business activity. Thus, such a shareholder must pay ZUS and health insurance contributions on remuneration for benefits provided to the company. By contrast, shareholders in multi-member limited liability companies pay neither ZUS nor health insurance contributions.
Shareholder remuneration and hidden dividends
Finally, it is worth noting that provisions on so-called hidden dividends (Article 16(1)(15b) of the CIT Act) will enter into force on 1 January 2023. Under them, a company will not be able to include in tax-deductible costs expenditure related to a benefit provided by an entity related to that company or its shareholder under transfer pricing rules, if the cost constitutes a hidden dividend.
The above costs constitute a hidden dividend if:
their amount or the date they are incurred depends in any way on whether the taxpayer earns a profit or how much profit it earns; or
a reasonably acting taxpayer would not incur such costs, or could incur lower costs for a comparable benefit provided by an entity unrelated to it, with the arm's-length principle applying to determination of the costs; or
the costs include remuneration for the right to use assets owned or co-owned by the shareholder or an entity related to the shareholder before the taxpayer was established.
It is impossible to predict today how tax authorities will approach remuneration paid to shareholders for benefits to the company from next year. It seems that, if the benefits or services relate to the company's business and remuneration is set on market terms, the hidden-dividend provisions should not apply. However, it is worth monitoring the authorities' position on this matter.
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