The main incentive to use such a scheme is to reduce the recipient’s personal income tax burden, ZUS (social security) and health contributions.
Yet structuring a remuneration split requires careful planning. Attention must be paid to several factors such as:
- The tax residence status of the management board member
- The character of their engagement within the company’s structure
- Their capability and competences to provide business operations in Poland.
Tax residency rules in Poland
An individual whose place of residence is in Poland has unlimited tax liability in Poland. Because such an individual is deemed to be a Polish tax resident, the individual's worldwide income is subject to taxation in Poland, regardless of where the source of income is located.
An individual is defined as resident in Poland if at least one of these conditions is fulfilled:
- The individual’s centre of vital interests (i.e. centre of economic or personal interests) is in Poland,
- The individual stays in Poland for longer than 183 days in a given fiscal year.
Conversely, individuals who do not meet the above criteria have limited Polish tax liability, They are therefore treated as non-Polish tax residents and are only liable to pay Polish income tax in respect of their Polish-sourced income.
These Polish tax rules are compliant with the provisions of double-tax treaties to which Poland is a party. So if a foreign individual meets the criteria for residence in Poland according to Polish domestic rules, the criteria of a respective double-tax treaty should be taken into consideration when deciding in which country that individual has a place of residence for tax purposes (tie-breaker rules). The double tax treaty between Poland and the UK determines residence on the following factors:
- Permanent home
- Centre of vital interests – if an individual has a permanent home in both countries
- Habitual abode – if the centre of vital interests cannot be determined, or if an individual does not have a permanent home available to them in either country
- Nationality – if an individual has a habitual abode in both or in neither of the countries
- Mutual agreement determined by the competent authorities – if an individual is a national of both countries or neither of them
Polish tax residents
When a Polish tax resident carries out management duties for a Polish company, the remuneration provided to such a management board member (regardless of whether it’s received solely on the basis of a resolution of the company’s body, an employment contract, or a civil law contract) is subject to progressive taxation in Poland. In practice, that’s most often 32% PIT.
A difference when remunerating a management board member on the basis of a company resolution or a civil law contract, rather than a standard employment contract is that monthly tax advances are usually calculated at the 18% PIT and the final tax settlement is calculated when the individual files their annual tax return. This usually results in the obligation to make additional tax payments if their annual income exceeds the 18% PIT threshold. In case of regular employment, monthly tax advances are calculated on a progressive basis during the entire year.
Importantly, remuneration received by a management board member solely on the basis of a company resolution is not subject to social security and health insurance contributions in Poland.
A split-remuneration scheme means that the total remuneration of a management board member is paid according to two separate legal arrangements:
- Part of the remuneration, corresponding directly to the duties specific for a management board member, on the basis of an appropriate resolution of the Polish company’s authorised body
- The remaining part relating to activities of an advisory nature, separate from exercising the function of management board member, is paid within the business activity conducted by the individual.
The benefit of such a scheme is that the part of remuneration corresponding to the duties of a management board member is not subject to social security and health insurance coverage. This may imply significant savings in these fields. And the part of remuneration which corresponds to the advisory services performed by a management board member within business operations may enjoy a 19% flat rate of taxation, which may result in significant savings in the field of personal income tax.
Finally, any management board member who runs their own business (ie operates as a sole trader) may be allowed to decrease their PIT taxable base by the amount of reasonably incurred tax-deductible costs and to recover some part of the VAT charged on the acquisition of goods and services connected thereto.
This is not so easy…
Implementation of split-remuneration scheme requires careful planning and should always be tailored to the management board member’s specific situation. In particular:
- Any distinction drawn between different forms of engagement of a management board member has to be reasonably justified by the company
- Since a management board member cannot provide services of a management character, but merely of an advisory nature, it’s worthwhile gathering appropriate documentation confirming the scope of services rendered
- The ratio of the remuneration split must correspond to the actual involvement of a management board member in performing a given scope of activities within the company’s structure.
Additionally, the application of a 19% flat rate of tax of business income requires the fulfilment of a few conditions:
- The services cannot be rendered to a former/current employer if such services are of the same nature as work previously performed on the basis of an employment contract
- The services cannot be managerial in nature
- The individual loses the right to some tax reliefs and the right to file a joint marital annual tax return.
Non-Polish tax residents
As regards non-Polish residents, remuneration provided to a management board member solely on the basis of a resolution of the appropriate body of a Polish company is subject to a 20% flat rate final tax in Poland.
As regards non-Polish tax residents, however, the provisions of the applicable double-tax treaty should be taken into consideration when deciding which remuneration scheme may be applied and whether this will lead to tax-efficient solutions for the management board member. Potential advantages can also be obtained, depending on the tax system in the country of residence of the particular management board member.