Acting as a board member without remuneration is considered as free of charge benefit for the Company
Judgment of the Supreme Administrative Court
If a board member performs his/her duties without remuneration, there is a risk of free of charge benefit for the Company - this is the conclusion resulting from the recently published judgment of the Supreme Administrative Court of October 30, 2019.
The above sentence may have a significant impact on many entities operating in the Polish market. In practice, board members and proxies of the companies do not often receive remuneration for the performed work. The above situation usually takes place when board members have concluded employment contracts with the company, however the employment contract do not indicate clearly the amount of remuneration which is due for performing the board member’s duties. Another example existing in the market practice (when a board member does not receive a remuneration from the Polish entity for the performed duties) is a situation when a board member is a foreigner employed solely by the foreign entity which is assigning him/her to Poland in order to perform board member’s duties in the Polish company. In such case, the entire amount of remuneration is paid out by the foreign entity.
The issue of board member’s remuneration has become particularly important in the light of one of the latest judgments of the Supreme Administrative Court regarding free of charge benefits from the perspective of Corporate Income Tax (judgment of October 30, 2019, ref. no. II FSK 3717/17). The case concerned board members of the Polish company who did not receive any remuneration from the latter for the duties performed and who were employed solely by the parent company. As a result of the above (in the opinion of the Supreme Administrative Court) the Polish company received free of charge benefit representing specific financial value that should be recognized for corporate taxation. The rationale behind this was the fact that the Company could have disposed an amount of money equivalent to the amount of remuneration that would have been considered as the Company's cost in case it had been paid out to their board members. Consequently, the equivalent of the board members’ remuneration was recognized as a saved expense for the Company.
What is important, in the opinion of the court, the above circumstances are not altered by the fact that the board members were employed under an employment contract by the parent company holding 100% of the Polish company’s shares for the benefit of which the board members performed their duties.
At the same time, according to the Supreme Administrative Court, performing board member’s duties without any remuneration would not constitute a free of charge benefit for the company in case the board member was a shareholder/stockholder of the company in which he/she performs the duties without remuneration.
Nieodpłatne świadczenie dla Spółki z tytułu pełnienia funkcji członka zarządu bez wynagrodzeniaWersja polska
Corporate Income Tax
Bearing in mind the above-mentioned judgement of the Supreme Administrative Court, we would like to point out that there is a risk of increased interest of the tax authorities in the issue of free of charge benefits in the context of company’s executives performing duties without remuneration. Consequently, during the tax audits, tax authorities may pay particular attention to the fact whether the board members or the company’s proxies receive remuneration for the performed functions. In case no remuneration is determined for persons assigned from the parent companies to perform the functions of the board members, as well as in case no separate remuneration is specified for the individuals employed by the company in which they are board members, there is a risk of free of charge benefit for these companies to be recognized for corporate income tax purposes.
At the same time, in the absence of a Polish legal relationship on the basis of which the remuneration of a board member is paid out to him/her, but companies agreed an additional fee for the provision of this type of services (so-called "Management fee"), in our opinion, there is a chance to claim that there is no income from free of charge benefits on the Polish company's side. Still, in such situation it should be taken into account that the costs of management fee could be excluded from the company’s tax deductible costs based on Article 15e of the Polish Corporate Income Tax Act.
Personal Income Tax
This issue is important also from the Personal Income Tax point of view. In our opinion, it causes the necessity to analyze the current engagement structure of the board members and proxies in terms of the functions performed by selected individuals under current forms of engagement. In particular, companies should analyze current contracts concluded with the key persons in the company in terms of their function in the organization and the way in which they are remunerated for performing the board members’ and/or proxies’ duties.
It should be also stressed that foreigners who are board members in Poland engaged based on the foreign employment contracts, in general, are obliged to tax in Poland part of their remuneration received in connection with their work physically performed in the territory of Poland. Thus, the companies could consider concluding additional local agreements with such individuals in order to lower the above-mentioned risk and simplify the method of tax settlement for these individuals.
When analyzing the engagement structure of the board members and proxies, the provisions regarding transfer pricing also should be taken into account. They may result in the need of introducing remuneration for services provided at the market level, as well as they may result in the need of preparing transfer pricing documentation. It should be noted that due to the wide scope of definitions of related entities, transfer pricing obligations may occur not only in case when the board members or proxies will be employed in another company of the group.
If you would like to receive additional information or Deloitte’s support regarding the above, please do not hesitate to contact us. We will be happy to support you in terms of the appropriate analysis of the possibility of introducing changes in the remuneration structure aimed at organizing the existing structure, taking into account the business needs and corporate governance of your Company.