One of the frequently used in practice methods of settlement between a company and a shareholder/board member is the performance of services (usually intangible) as part of a business activity. This method usually leads to tangible tax benefits (generation of deductible expenses on the part of the company, the possibility of applying more preferential tax rules to the income earned by the shareholder / board member than in the case of dividends). Therefore, it is important to properly shape the relationship between the two parties..

Is it permissible for a shareholder / board member to invoice the company?

In the current legislation, there is no legal basis from which a prohibition to apply such a method of accounting in the case of companies that are CIT taxpayers (i.e. limited liability companies, joint stock companies, simple joint stock companies, limited partnerships, limited partnerships, limited joint-stock limited partnerships and certain general partnerships). However, it is necessary to carefully analyze the tax consequences associated with this.

In general, it can be said that benefits other than intangible services (i.e., for example, renting, providing real estate or equipment) are relatively unproblematic. In the vast majority of cases, a company incurring such expenses will be entitled to include their value in tax costs, as long as the price established in such a transaction is marketable and the use of the item/property in question is useful from the perspective of the company's operations. In doing so, the rental / provision of property and equipment may be subject to VAT.

Here it is necessary to analyze the individual situation of the individual. This is because it may benefit from a VAT exemption (concerning turnover not exceeding PLN 200,000 per year). Then these services are not subject to VAT and there is no need to document them with invoices (although it can be done and it is not a bad idea because of the need to have documents that are the basis for including the purchase expenses in VAT).

However, if it is not possible to take advantage of the exemption or it has been waived, such services are subject to VAT - with all such consequences, i.e., in particular, the obligation to make payments to an account appearing on the white list. The company will be able to deduct VAT if the expenses are related to its taxable activities (which in most cases will be correct, unless the company in question performs VAT-exempt activities or the purchased benefits/services are not useful at all from the perspective of the company's activities).

Of course, you also need to analyze the situation of an individual and the accounting of income from this on the grounds of PIT, Social Security and health contribution.

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What about intangible services?.

The matter becomes more complicated when a shareholder / board member intends to perform intangible services / benefits such as marketing, consulting, advertising, business development and similar services. This is due to the ties that exist between the shareholders / board members and the company, as well as the difficulty of proving that the services were actually performed, resulting in a great deal of distrust by the tax authorities of such a method of accounting.

Our practice shows that special attention should be paid to the following issues:

1) Subject matter: a common mistake made in connection with the formulation of the subject matter of the contract is to refer to benefits / services related to management or supervision. This is a very tax risky activity. According to the regulations, income from the provision of management services is subject to PIT as income from the so-called management contract, which is taxed according to the general rules (i.e., the tax scale), and this is true even if it is earned in the course of business activities. The possible consequences of "transforming" a B2B contract into a management contract can therefore be very severe.

How, then, to formulate the subject matter of a service contract between a company and a member of the management board, a partner? It is good practice to be as detailed as possible to indicate the scope of activities that the person undertakes to perform. This makes it easier to account for these revenues on the part of the shareholder / board member and makes it easier to justify the entire structure from the perspective of the company's needs.

2) Market nature of services: the price of services, benefits under the contract must be set at market level. This can be established in two ways. Thus, it is a matter of comparing the remuneration offered to the shareholder, member of the board of directors with the amounts that an unrelated party would expect for the performance of similar services. It is also important to maintain a certain consistency in this regard. For example, a member of the board of directors, as a rule, is also remunerated for performing his or her function on the basis of a resolution of appointment, which means that he or she is not temporarily engaged in providing services as part of a full-time business. This issue should be taken into account when valuing the value of the remuneration payable to the board member/shareholder.

In addition, it is worthwhile that the rules for determining the remuneration awarded to different members of the board of directors do not differ from each other in a material way. For example, if a 50/50 split of remuneration from the appointment resolution and the B2B agreement is applied to one board member, it seems reasonable to apply a similar solution to other board members. Such a "reasonable" approach lends credibility to the entire structure.

3) Exclusion of a subordination relationship: it is very important that a B2B agreement with a shareholder, a member of the board of directors is not similar in its content to an employment contract. First of all, you need to exclude all elements of subordination, so make sure that the place and time of performing services are free. Also, the management board member's liability to third parties should not be limited in a B2B contract in a manner similar to employment contracts. The lack of bearing of economic risk by the board member / shareholder is an argument that brings the legal relationship with the company closer to an employment contract.

It is also worth bearing in mind the rules for determining remuneration. A fixed amount of remuneration brings a B2B contract closer to an employment contract. For this reason, consider setting the amount of remuneration based on an hourly or daily rate. It is also an interesting idea to set the amount of remuneration on the revenue generated by the company in connection with the activities undertaken by a given partner.

4) VAT: as in the case of non intangible services, special attention should be paid to the question of the VAT taxability of such services. Note: in the vast majority of cases, the application of VAT exemption will not be possible due to the fact that consulting services always exclude the right to exemption.

It is also worth noting that there are rulings according to which, in order for the services in question to be subject to VAT, it is necessary that the rules of liability to third parties by the individual in question arise from the B2B contract in question. It is therefore worth securing this element.

5) Documentation: in the practice of tax authorities, a position has developed according to which, in order for a given taxpayer to retain the right to count intangible services as tax expenses, it is necessary to have tangible documentation that confirms that such services were performed. This condition is not apparent from the regulations. Nevertheless, it is a fairly well-established position, and for this reason it must be observed.

It is therefore worthwhile for a B2B contract to provide rules for production and collection of such documentation. It is also good practice to include a provision in the contract obliging the individual to present such documents after the termination of cooperation. We then protect ourselves in the event of a tax audit, which is initiated after the expiration of the B2B contract.