Invoicing of one’s own company by partners no longer so obvious – a change in the approach of the tax authorities.
It is quite common practice for partners in their sole proprietorships to invoice their companies for the services they provide. In this way, the acute effects of double taxation of corporate profits are reduced. The company recognises such an invoice as a deductible expense. This reduces the taxable income and, consequently, the CIT itself. The company can deduct VAT from the invoice received.
These are not the only advantages, as the partner may also tax the income according to the rules and rates of the chosen, more favourable form of taxation. This is usually a flat tax or a lump sum tax on registered income. Most often, therefore, due to such settlement, the total tax burden is lower (in comparison with double taxation when distributing profits from companies).
Such a solution generates lower revenues to the state budget – and this, as you can guess, does not please the tax authorities.
What is the tax office’s current position on company invoicing?
According to the fiscus, the solution presented is an attempt to circumvent the law.
And despite the fact that previously the fiscus accepted the aforementioned practice, now taxpayers applying to the tax authorities for the issuance of an individual interpretation with regard to services performed for the company – are refused.
Reminder!
This is the power the tax authorities have when they conclude that an anti-avoidance clause applies to a case.
We would like to cite the example of a dentist who received an explanation from the tax authorities:
“We presume that your course of action may be artificial. And the aim is to achieve a contrary tax advantage”.
The dentist wanted, on the basis of a B2B contract, to settle on a flat rate basis the dental and training services performed for the limited partnership in which she is a partner. In the tax office’s view, her remuneration is a tax-efficient vehicle for the transfer of cash to her. This is because, in the tax office’s view, setting up a business and providing services to her own company will allow her to apply lower tax rates. If it were not for the tax benefits, a rational entity would not have acted in this way.
This is not the only example.
A partner in a limited partnership who provided brokerage and market research services for the partnership and wanted to tax them on a flat rate basis obtained a similar opinion. The tax authority also refused to issue an interpretation to him, accusing him of circumventing the regulations. It decided that both the company and the partner benefit from the agreements, which is prohibited optimisation (both examples after rp.pl).
We would also like to draw your attention to the fact that the change in the approach of the tax authorities is not related to a change in the law. In light of the tax laws, a partner running, for example, a sole proprietorship, may therefore conclude an appropriate agreement with his company, under which he will provide services to it, and the company will pay him remuneration on the basis of invoices issued.
Moreover – the provision of services to the company free of charge by a partner results in the recognition of the service for taxation in the company. However, this already obviously does not bother the tax authorities….
Despite the fact that the aforementioned actions of the partners are legal, we recommend great caution in this regard due to the fact that the transactions are made between related parties. In order to minimise the risk of a shareholder’s (especially a board member’s) cooperation agreement with his company being undermined, it is advisable to follow a few important rules.
What are the rules?
Contractual activities should not overlap with management duties.
The contract concluded between the board member and the company must precisely define the scope of services. They must not overlap with managerial activities (in particular, the services of managing and directing the company’s affairs).
It is therefore advisable for the board member to invoice the company for functions other than those related to his/her duties on the board, as this would result in him/her receiving money twice for the same activities. As you can guess – such an action will be quickly spotted by the treasury.
Contractual activities should actually be performed.
This aspect seems obvious; issuing empty invoices is a serious breach of tax law. Often, however, contracts between a partner and a company are notoriously challenged by the tax authorities as fictitious contracts.
In order to adequately protect oneself in the event of such a contract being challenged by the tax authorities – we recommend proper documentation of the services provided, which the taxpayer will be able to present in the event of an audit.
The terms of the contract should correspond to market conditions.
In practice, this means that the agreed amount for the provision of these services in the invoices must correspond to market prices. The prices for the services performed cannot therefore be artificially and grossly inflated – they must correspond to market realities and be properly documented.
This is stipulated in the tax law, which states that related parties are obliged to establish transfer prices on the terms that unrelated parties would establish between themselves.
At the moment, it is difficult to say whether the change in the approach of the tax authorities that we have presented to you is system-wide or whether these are incidental cases. However, it is certainly necessary to strengthen vigilance on this issue and, above all, to observe the further steps of the tax authorities.
At our law firm, we support our clients on an ongoing basis in structuring the forms of cooperation of management boards as well as shareholders with companies. We make sure that the activities are structured so that they cannot be challenged by the tax authorities. We encourage you to contact our team of experts – we will be happy to answer all your questions.
