Does a gratuitous service provided by a board member in a capital company constitute income under the Corporate Income Tax Act?

The Management Board is one of the company’s bodies responsible for conducting the company’s affairs and representing it externally. Based on the regulations concerning a limited liability company, according to the provisions of the Commercial Companies Code, its members may be chosen from among the shareholders as well as from outside their group. Article 201 § 4 of the Commercial Companies Code states that members are appointed by a resolution of the shareholders’ meeting, unless the company agreement provides otherwise. Persons appointed to the body may perform their functions based on an employment contract, a letter of appointment, a management contract, or a managerial agreement. However, the provisions are silent on remuneration for members of the management board. It is generally accepted that such remuneration may be granted but is not obligatory. Therefore, in business practice, different scenarios can be observed. In some companies, the management board consists solely of shareholders who perform their duties on a voluntary basis, while in others, external persons manage the company and receive appropriate remuneration. There are also cases where both shareholders and outsiders sit on the board and perform their duties without pay. In this article, we primarily aim to explain the issue of unpaid services provided by management board members and their consequences under tax law.

Unpaid benefits under the Corporate Income Tax Act

Under Article 7(1) of the Corporate Income Tax Act (CIT), “the subject of taxation is income consisting of the sum of income earned from capital gains and income earned from other sources of revenue. In the cases referred to in Articles 21, 22 and 24b, the subject of taxation is revenue.” The provisions contain an open catalogue of taxable events under the discussed regulations. According to Article 12(1)(2) of the CIT Act, this catalogue includes “the value of received goods or rights, as well as the value of other benefits in kind, including the value of goods and rights received free of charge or partially free of charge, as well as the value of other unpaid or partially paid benefits.” However, the CIT Act does not provide a definition of unpaid benefits. The regulation only indicates how the value of such benefits should be determined. Due to the lack of a definition, doctrine and the tax authorities have identified characteristics that such a benefit should meet. Following the work of Radosław Kowalski, it is indicated that an unpaid benefit occurs when the recipient has no obligation to provide a counter-performance, and one party receives a benefit at the expense of the other. Such a benefit will not occur if the party performing the benefit will receive some advantage in the future. In summary, the benefit arises when the taxpayer obtains a certain economic advantage that does not entail the necessity of incurring expenditure, cost, obligation to pay remuneration, or issuing another equivalent. Thus, the essential feature of unpaid benefit is the absence of the obligation to provide a counter-performance by the recipient.

Unpaid benefit by a management board member who is not a shareholder – tax consequences

To indicate the consequences under the CIT Act related to a management board member performing their duties without remuneration, two scenarios must be considered. Let us examine the first case, in which the service is performed free of charge by a person who is not a shareholder of the company. In this case, based on the case law of administrative courts and numerous tax interpretations, it must be assumed that a benefit occurs on the part of the company. Thus, the person sitting on the management board performs their duties without pay, and the other party is not obliged to provide any counter-performance. Consequently, in this scenario, the unpaid service by the member will cause income on the company’s side, which will be subject to taxation.

Unpaid benefit by a management board member who is a shareholder – tax consequences

Now let us analyse the case in which the management board member is a shareholder of the company and performs their duties without remuneration. Recently, several tax rulings favourable to shareholders have been issued in this regard. Currently, the tax authority states that performing the function of a management board member without pay by a shareholder does not constitute a benefit for the company under the CIT Act. This position is justified by the fact that, for example, a shareholder who simultaneously sits on the board expects to receive an appropriate economic advantage in the future in exchange for performing their duties as an owner. It is also pointed out that such a shareholder holds specific proprietary rights in the company, such as the right to dividends or the right to a share of the company’s assets upon liquidation. The rulings emphasise that a particularly important element in this situation is the managerial factor, which lies with the shareholder serving on the board. The shareholder, acting with due diligence in their role as manager, expects that this will eventually result in certain economic benefits. Analysing this situation in this way, the authorities indicate that performing management duties without remuneration and sitting on the board as a shareholder will not result in income for the company.