More and more often, Director of the National Tax Information (KIS) refuses to issue individual interpretations. The basis for such decisions is the justified suspicion that the activity described by the taxpayer may be considered as tax avoidance (i.e., Article 119a § 1 of the Tax Ordinance). Recently, such decisions have been issued particularly frequently in case of the provision of services (B2B) to a company by a member of its management board. The tax authorities’ change in approach is particularly noticeable in the case of entrepreneurs applying for an interpretation regarding the appropriate lump-sum rate.
PROVIDING SERVICES TO A COMPANY BY A BOARD MEMBER – “MANAGERIAL” SERVICES
In the past, the issue of providing services (B2B) by members of the management board/shareholders to the company has been the subject of numerous discussions. In this regard, the tax authorities’ position has not undergone any significant changes. In the tax authority’s view, “managerial activities” should not be accounted for as economic activity and, as a rule, they constitute income from activities carried out personally (article 13 point 9 of the PIT Act), and therefore must be settled according to the tax scale.
PROVIDING SERVICES TO A COMPANY BY A BOARD MEMBER – SERVICES OTHER THAN “MANAGERIAL”
However, what about services other than those involving “management” of the company? According to the principle of freedom of contract, such cooperation is permissible – as long as it is reflected in the services actually provided and does not violate tax law.
In practice, it often happens that taxpayers, in addition to managerial activities (e.g., within the scope of their appointment), provide other B2B services to the company. In such cases, agreements often clearly distinguish services provided based on the contract from obligations performed within the scope of managerial activities. Services provided under a B2B contract have no connection with management. Taxpayers often rely on the content of the company’s internal regulations, ensuring that the services are valued at market value, and that the contract itself is concluded in accordance with the regulations (including Article 210 of the Commercial Companies Code).
So far, the tax authorities have not questioned the possibility (or legality) of concluding such contracts – see, for example, the letter of 17 January 2013 from the Tax Office in Warsaw, reference number IPPB1/415-1503/12-4/EC, or possibly from 7 June 2017, reference number 0112-KDIL3-1.4011. 18. 2017.1. KS.
SO WHAT’S THE PROBLEM?
At the moment – as a rule – there is no problem with so-called “hard” activities, which have market value, economic justification, and some tangible result. The problematic issues are the so-called “intangible services” that do not have a measurable effect in the form of a finished product. Because it is difficult to draw the line between managerial activities and services such as sales intermediation, maintaining relationships with key clients, or marketing activities, the tax authorities begin to argue that these activities should not be classified into different groups. Recently, the catalog of activities that – in the opinion of the tax authorities – are included in “management” of the company has been clearly expanded.
FIRST NEGATIVE INTERPRETATIONS
Since the beginning of 2022, negative interpretations in this topic have started to be ussued. This means that the Director of the National Tax Information (KIS) has substantively recognized the matter and issued a negative decision to the taxpayer.
“The scope of activities mentioned – which you will perform under the B2B agreement – indicates your managerial (decision-making) role, resulting in this agreement being essentially a contract similar to a management contract, as referred to in Article 13 point 9 of the PIT Act.
Interpretation of the Director of the National Tax Information dated April 15, 2022, reference number 0112-KDIL2-2.4011.1093.2021.4.AG
(…) As we have already indicated above – the income obtained on the basis of management contracts, even if these contracts are concluded within the framework of the taxpayer’s economic activity, will always be classified as income from activities carried out personally, in accordance with Article 13 point 9 of the Personal Income Tax Act.”
This position was controversial, but it left the taxpayer the opportunity to engage in a substantive dispute with the authority.
UNALLOWED TAX OPTIMIZATION
Currently, the Director of the National Tax Information does not engage in substantive discussion and refuses to issue interpretations. The basis for the negative decision is that the taxpayer’s situation raises justified suspicion that it may be an activity specified in Article 119a § 1 of the Tax Ordinance (i.e., tax avoidance or an element of such activity). This is a “suspicion”, however, (1) it constitutes a condition for refusing to issue an interpretation and, more importantly, (2) it may signal the need for a tax inspection.
According to the National Tax Information, such cooperation is artificial due to the transfer of the company’s services to taxpayer’s (shareholder and member of the management board) activities within his B2B activities. The artificiality of this “structure” concerns the taxpayer, who may gain a tax advantage because B2B income will be taxed “more favorably” than under the tax scale. In this case, in the form of a lump sum on recorded revenues.
Interestingly, the National Tax Information seems to broadly define the so-called managerial activities – including in that term i.a. maintaining commercial contacts with customers, promoting products, or searching for customers or contractors. According to the authority, a member of the management board should perform the described services within the framework of the relationship arising from being a member of the management board. The “artificial” allocation of the scope of activities described in the application and the attempt to settle them within the framework of lump-sum income tax bear the hallmarks of actions dictated solely by fiscal purposes. The authority assumes that if it were not for the possibility of obtaining a potential tax benefit, a rational entity would not adopt this mode of operation and would not conclude such a contract with its member of the management board.
Providing services to a company by a board member – change of the tax authority’s approach
For years, the tax authorities have been trying to combat so-called intangible services provided by the management staff to “their” companies. However, the current situation is somewhat different. After all, there has been no significant change in the regulations in this area. There is no clear and binding definition of “managerial activities” for tax purposes. Of course, this seems to be inconsistent with the principle of freedom of contract, and let us note that in this situation, there is basically no such “optimization character” on the part of the company itself.
The fact is the Director of the National Tax Information began to change his approach in a rather dangerous way for taxpayers. Interestingly, the authority clearly states that the structure itself has the characteristic of artificiality. If it refers to the scope of activities under the B2B agreement, it concisely states that the services indicated by the taxpayer constitute “managerial services”. This means that the National Tax Information is beginning to expand the scope of “managerial activities” to include additional elements. The question is how far this expansion can go and where the limit lies?
The issue of interpretation or lack thereof is one aspect, but it is very likely that tax inspections may follow these actions. One thing is certain: if a member of the management board provides services to the company, they must be extremely careful!
PROVIDING SERVICES TO A COMPANY BY A BOARD MEMBER – Caution!
In practice, the most exposed to consequences will be board members/shareholders who intend to provide intangible services (in the B2B format) to companies in which they hold managerial roles. It applies especially to services such as commercial mediation or building customer relationships, which theoretically could be settled at the 8.5% lump-sum rate.
The situation fundamentally concerns the lump-sum on recorded revenues. However, the National Tax Information’s argumentation may also apply to taxpayers opting for, for example, a flat tax. Moreover, it seems that currently, services that are not related to management and mediation are beyond the tax authority’s interest. However, since the issue is evolving, even these individuals should keep their finger on the pulse.
HOW CAN WE HELP?
We have already written about the issue of settling the revenue lump-sum by managers here. If you are in a situation where a member of the management board provides services to the company, we recommend contacting us. Each situation is different, and even the smallest details matter here. We support our clients by verifying their individual situation.
In this case, it is usually necessary to analyze the B2B agreement (as well as the contract/appointment) and the actual performed activities. We prepare appropriate calculations regarding tax consequences. Then, during individual consultations, we explain any questions or doubts and discuss the possibilities of reducing tax risks.
If you have any questions regarding lump-sum settlement, please visit www.outsourced.pl .
