Why a limited liability company?
The limited liability company is the most popular form of conducting business in Poland. This is hardly surprising. This business form allows for the limitation of the entrepreneur’s financial liability (the partner is not liable with his/her private assets), can be established with a low financial outlay (the minimum share capital is merely PLN 5,000) and enjoys greater prestige – such a business is perceived more professionally than a sole proprietorship. There is also the advantage of being able to set up a company online, although this has certain limitations.
By far the biggest advantage of a limited liability company is the limitation of liability of its partners. As a result, a partner does not have to worry about financial failure, because in the event of bankruptcy, as a rule, he or she is not liable with his or her own personal assets. Exceptions to this apply to partners who are also members of the management board and who fail to comply with the requirements set out in the Commercial Companies Code .
The limited liability company as a separate taxpayer
However, all these advantages do not change the fact that a limited liability company is not tax transparent. What does this mean? A limited liability company generates a certain income and pays income tax on it. The money then does not yet belong to the partner, but to the company. In order to enjoy the profit, the partner must first distribute the profit from the company, e.g. in the form of dividends, which, however, also requires tax to be paid, this time not by the company, but by the partner. In a way, this results in double taxation of profit. First on the level of the company, and then on that of the partner. As a rule, the company pays CIT at 19% or 9% (if it has the status of a small taxpayer). The 9% rate does not apply to proft from shares in the profits of legal persons (a situation where, for example, a limited liability company is a partner in another limited liability company). The partner then pays income tax on the distribution of profit from the company to himself (e.g. when he does so in the form of dividends, he pays a 19% flat-rate income tax).
In order to optimise taxation, partners decide on various ways of withdrawing profit from the limited liability company.
Ways of distributing profit from a limited liability company.
1) Dividend
The most classic way of distributing profits. It consists in the partner of the limited liability company adopting a resolution on the distribution of profit and allocating it to the payment of dividends. In addition, the company’s financial statements must be approved before the dividend is paid. Dividends are subject to 19% flat-rate income tax. This is the safest, although not always the most optimal, way to pay money out of the company. It is also possible to make dividend advances during the tax year. However, the advance payment requires additional conditions to be met and is subject to lower limits. The important point is that neither the dividend nor the advances are tax deductible for the company (so the company pays CIT on the larger amount). However, dividends are not subject to health and social security contributions.
2) Remuneration for serving as a board member
Another way to remunerate a shareholder may be to grant remuneration for serving as a board member. Of course, this requires that the shareholder is also acting as a member of the board of directors. The granting of remuneration to a member of the management board requires a resolution of the shareholders. This solution already has an advantage over dividends in that the board member’s remuneration can be included in the company’s deductible costs. This in turn reduces the amount on which the company pays CIT. The remuneration is subject to a health contribution (9% of revenue), but is not subject to social security contributions.
The remuneration of a member of the management board is taxed under the tax scale – at a rate of 12% up to the amount of PLN 120,000 per annum, and 32% after exceeding this threshold. A tax-free amount of PLN 30,000 also applies.
3) Employment contract
Partners often also choose to enter into an employment contract with the company. Such an agreement has similar tax and contribution consequences as remuneration for serving as a board member. Here, too, it is taxed under the tax scale – at a rate of 12% up to PLN 120,000 per annum, and 32% after that threshold is exceeded. A tax-free amount of PLN 30,000 applies. The company may recognise this remuneration as a tax expense.
However, there is a difference in terms of contributions with respect to this remuneration. Remuneration for employment is subject to social security contributions. Therefore, this option is most often chosen by partners who simultaneously carry out sole proprietorship and for whom there is a concurrence of social insurance titles. In principle, such a procedure makes it possible to pay social insurance contributions only on the basis of an employment contract concluded with the company (often covering the minimum wage, so as to reduce the contribution base as much as possible). However, it should be borne in mind that entering into an employment contract with a company in which one is a partner is always fraught with risk depending on the number of shares held and one’s possible function on the company’s board. We recommend contacting an expert in this regard.
4) B2B agreement with the company
A partner running a sole proprietorship at the same time may decide to provide services to the company against payment. The remuneration paid to the partner-servicer will be deductible for the company. On the part of the partner, the remuneration will be taxed in accordance with the form of taxation of his business activity (i.e. under the general rules, lump-sum or flat-rate taxation). Depending on the type of services, VAT may also come into play (and on the other hand, the possibility to deduct input VAT by the partnership). Revenue from services rendered generally affects the entrepreneur’s health contribution, although the details depend on the form of taxation chosen. In addition, the entrepreneur pays social security contributions on a general basis.
This solution, too, is not without risk, especially if the partner also serves on the company’s board. An example of ineffective tax optimisation in this respect are the so-called managerial contracts, which are fashionable among entrepreneurs and involve the provision of management services to the company, concluded as part of business activity, which are subject to tax calculated in accordance with the general rules, i.e. according to a scale, regardless of the chosen form of taxation. Before providing any services to a company in which you are a partner, it is best to consult a specialist. The tax authorities are very thorough in analysing this solution from the point of view of avoiding taxation of dividends, and often question the services provided as ostensible or overlapping with activities within the framework of the company’s management. The terms and conditions of the services themselves (i.e. primarily the partner’s remuneration) should be set at market level, as they constitute transactions between related parties.
5) Recurring non-monetary provisions of partners
The last mentioned method of payment from the company to the partners is based on Article 176 of the Code of Commercial Companies, which gained popularity shortly after the introduction of the so-called “Polski Ład” tax novelisation. According to the cited provision, the articles of association of the company may impose an obligation on the partner to provide additional recurring services to the company. These obligations should be indicated in the agreement, and their introduction requires the consent of the parnter himself. Examples of such services may be the provision of tools or materials to the company, the provision of equipment or the provision of certain services. The service must be recurring, i.e. it must be provided by the partner on a regular basis and, moreover, in return for payment (which is the whole point of this solution).
The partner’s income from recurring non-monetary provisions is taxed according to the tax scale. This remuneration is not subject to social insurance or – unlike remuneration for acting as a member of the management board – to health contributions. A tax-free amount of PLN 30,000 applies. The company may include this remuneration in its tax costs. It is worth noting that if renumaration won’t exceed 120 000 PLN, it will be taxed lower (12%) than dividend (19%).
The biggest advantage of this solution – not being subject to both health and social insurance contributions – is at the same time its biggest risk. Unfortunately, there are currently more and more frequent interpretations by the Social Insurance Institution indicating alleged abuses in the use of the institution of recurring non-monetary provisions and qualifying them as the provision of services subject to social contributions. The type of provision should be analysed before deciding to use it, and it is best to consult a professional.
Summary
The above outlines the most common ways in which partners attempt to optimise their income for tax and contributions. As can be seen, there is a whole range of methods by which to plan for the exit of profits. Each involves a certain degree of risk, but also a certain degree of benefit. The dividend, although being the ‘default’ form of distribution, requires the company to show a profit and is subject to a ‘fixed’ rate of taxation. However, the alternatives, which offer a greater tax advantage and do not require the company to show a profit or the formalities of approving financial statements, force the taxpayer to be more cautious so as not to be accused of attempting to circumvent tax rules or making unmarketable transactions between related parties. The most favourable result is often a combination of several of the above-mentioned methods, which, however, requires even greater diligence in the event of an audit by the tax authorities. In order to limit the risk and develop the best strategy in a given case, we recommend contacting the team of specialists at ATL LAW Anna Błaszak, who will analyse the company’s situation and propose the most effective solution.