The Director of the National Tax Information (KIS), in an individual interpretation issued on 26 June 2021, confirmed the position of a taxpayer regarding the possibility to treat as tax deductible expense the expenses incurred for remuneration of CEO of a company and, at the same time, its shareholder, under a contract for work concluded with him.
In a request for an individual interpretation, a limited liability company providing services in the scope of preparing project documentation asked whether it was possible to conclude a contract for work with CEO of the company and, at the same time, its shareholder, in order to execute projects and transfer copyright, and to recognise these expenses as tax deductible expense. The CEO performs his functions under an appointment and holds the necessary construction qualifications to perform independent technical functions in the construction industry. Pursuant to the provisions of the Commercial Companies Code, the work contract with the CEO would be signed by an appointed proxy.
Tax-deductible expense exclusions in the CIT Act
There were doubts as to whether it was possible to recognise the expenses incurred in respect of payment of remuneration to the CEO under a contract for work as tax deductible expense, looking at the exclusions indicated in the CIT Act.
Pursuant to the Corporate Income Tax (CIT) Act, deductible expense are costs incurred to earn revenue from a source of revenue or to retain or secure revenue. At the same time, it is necessary to bear in mind the exclusions provided for in the act regarding certain expenses that cannot be classified as tax deductible costs and the necessity to demonstrate that the cost is rationally and economically justified.
What is a unilateral benefit?
In the question posed in the application for an individual interpretation, the taxpayer asked whether one of the exclusions could be applied in the case at hand, i.e. the inapplicability of recognizing as tax deductible expense the expenses connected with making unilateral benefits for the benefit of shareholders of commercial law companies and the inapplicability of recognizing as tax deductible expense the expenses incurred for the benefit of persons who are members of the authority of a legal person, except for the remuneration paid on account of their function.
A unilateral benefit should be understood as a benefit in which only one party is entitled and the other is obligated, and it cannot be described as a situation in which a partner performs certain services for the benefit of the company under a civil-law agreement, for the performance of which the partner receives a reward. At the same time, the CIT Act does not specify the definition of a body constituting a legal person, therefore it should be understood as bodies authorised to make decisions concerning the company, e.g. the shareholders’ meeting, and not the CEO who performs the function of an executive body.
Thus, expenses related to the payment of gratuities to CEO under a civil law contract may be regarded as tax deductible expense. However, the issue of the possibility of classifying particular expenses as tax deductible expense in practice raises many doubts. Unfortunately, the tax changes planned under the New Deal Project (Nowy Ład) do not dispel these doubts, so should you have any questions please do not hesitate to contact our specialists.
Aleksandra Philips, LL.B., VAT Specialist