Tax Consultant at RSM Poland
It will not be inventive when I say that the aim of every enterprise is to achieve the best possible financial results. The final financial result is comprised of - as we all know - revenues and profit as well as costs and losses. Entrepreneurs, therefore, try to generate the former and limit the latter. A questions is often asked on the topic of limiting costs in capital companies as to whether members of the supervisory board are entitled to remuneration on account of their function in the said company. Some will say that the work contribution or the time devoted to executing the duties of a supervisory board member (especially a small one), of a limited liability company are so insignificant that they do not substantiate the need for the payment of remuneration to them on that account. Is the above statement legitimate and is such a saving in fact profitable for the company?
Free of charge, meaning with revenue for the company
Not exactly... In recent years, administrative courts and tax bodies more and more often are of the opinion that in a situation in which the members of a company's supervisory board discharge their duties free of charge (i.e. the company does not pay remuneration to them on this account), the performance received by the company in the form of the fulfilment of duties of a supervisory board member without remuneration is non-equivalent performance. This attests to the fact that it has a specific financial extent for the company, manifesting into the possibility of having an amount constituting the equivalent of hypothetical remuneration, which would be a cost for the company, if it were allocated and paid out. The benefit, therefore, includes the saved expenses, which the company would be obligated to incur, if the performance was of an equivalent nature. This opinion does not find its confirmation, among others, in the verdict of the Supreme Administrative Court of October 29, 2015, file ref. no. II FSK 2232/13 as well as the verdict of the Regional Administrative Court in Wrocław of January 22, 2014, file ref no. I SA/Wr 2061/13.
In consequence, the tax bodies and the administrative courts accept that in the case in which the members of the supervisory board of a capital company (and analogously also the members of the management board or the audit committee) fulfil their functions without receiving remuneration, revenue on account of receiving free of charge performance in the understanding of Article 184.108.40.206 of the Act of February 15, 1992, on Corporate Income Tax (i.e Journal of Laws from 2014, item 851 as amended), arises for these companies, which is subject to taxation (hereinafter also: CIT Act).
The value of such a free of charge performance is established on the basis of the provisions of Article 12.6.1 and 4 of the CIT Act, meaning on the basis of market prices applied in the provision of a service of a similar type (with the consideration of the circumstances of a given case) or also - if the subject of the performance are services falling under the scope of the business activity of the entity conducting the performance - according to the prices applied towards other recipients. In the case law, it is assumed that establishing the amount of the performance based on the market price means the acceptance of such an amount, which would reflect the amount of the remuneration, which a given company would most likely be obligated to pay to the members of its own supervisory board or also the amount of remuneration, which a given company would pay out to the members of the supervisory board (insofar as some of them receive remuneration, and others do not).
In summary - in the event the persons fulfilling the functions in the bodies of capital companies do not receive remuneration from the company on this account, revenue on account of the receipt of free of charge performance arises on the side of the given company, and the amount of that revenue most frequently reflects the remuneration that the given company would be obligated to pay to the members of the said bodies, if the performance were carried out against remuneration. In practice however, the indication of the value of free of charge performance may prove to be very difficult.
Shareholders an exception to the rule
In accordance with the dominant stance of the administrative courts and tax bodies, the exception to the above rule is a situation in which the functions in the company bodies are carried out by persons who, at the same time are shareholders (or stockholders) of a given capital company. Such a differentiation stems from the fact that the shareholder, on account of holding shares in a limited liability company, is entitled to indicate property rights, specifically the right to dividends, or the right to receive the company's assets in the event of its liquidation. This means that the free of charge (without remuneration) fulfilment of the function of a company body can bring a shareholder measurable economic benefits. In other words, a member of the management board, or a member of the supervisory board, who is at the same time a shareholder (stockholder) of a given company, despite the lack of "direct" remuneration on account of fulfilling the functions of a body member receives economic benefits, for example, in the form of a dividend. Therefore in this case, there will be no case of the lack of equivalence, constituting a mandatory condition for the occurrence of revenue on the part of the company for free of charge performance. Therefore in consequence, in the case of the fulfilment of the function of a body member by a shareholder of a given company without remuneration, there is no occurrence on the side of the company of revenue on account of the free of charge performance. The Supreme Administrative Court also confirmed such a stance, among others, in the verdict of October 29, 2015, file ref. no. II FSK 2232/134 and April 4, 2014, file ref. no. II FSK 1094/2012.
What is interesting, the above opinion maintains its validity also in a situation in which the functions of the capital company body are not fulfilled by its shareholder, but by an employee delegated to fulfil the function in the body of a subsidiary company. The tax bodies indicate that since it is deemed that the performance of a shareholder (natural person) acting as the member of a body is not a free of charge performance for the company, due to the fact that the said shareholder may expect dividends in the future as a form of equivalent performance, hence the performance of a legal person, which, in fact, may not carry out the performance in person, but agrees in exchange for this to delegate (and cover the costs of the activities) a relevant natural person (compare, among others, the individual interpretation of the Minister of Finance, issued through the Head of the Tax Chamber in Bydgoszcz of April 3, 2013, ITPB3/423-23/13 and from February 3, 2011 ITPB3/423-618/10/AM) should be treated in the same way.
Paid remuneration - more benefits than losses
Taking the above argumentation of the administrative courts and tax bodies into account, in planning the organization and the manner of the functioning of capital companies, it is worth noting who will comprise the company bodies and whether these persons will fulfil their roles in the company in a free of charge or paid manner. Not every saving - in the final settlement, will prove to be favourable for the company. By this I am referring not only to the CIT from the above indicated revenue on account of free of charge performance, but also from the possible interest on tax arrears, which may even amount to 12% per annum.
However, in establishing and paying remuneration to the members of the supervisory board for the fulfilment of their functions in this body, the Company limits the risk of deeming, by the tax authorities, that revenue on account of receiving free of charge (or partially paid) performance arises on its part. What is more, the costs incurred for the payment of the above mentioned remuneration can be allocated to the company's tax deductible costs, in accordance with Article 16.1.38a of the CIT Act. We cannot forget about the non-financial benefits, such as, i.e. the positive mood of the supervisory board members and the increase in their motivation to reliably carry out their responsibilities, which undoubtedly constitutes an additional profit for the company...