Ruling description

In its judgment of July 8, 2014 (case no. K 7/13) the Constitutional Tribunal tackled the controversial issue of taxation of gratuitous performances provided by employers to their employees.

The judgment was prompted by disputes  between taxpayers and tax authorities over the tax consequences of performances in kind provided by employers. Numerous controversies arose, in particular, over the tax consequences of participating in various kinds of events serving to integrate the workforce. Despite taxpayer protests, the tax authorities insisted on taxing potential performances offered to employees.

The Tribunal ruled that Article 12 Section 1 in conjunction with Article 11 Section 1 and Article 12 Section 3 in con- junction with Article 11 Sections 2-2b of the Act of July 26, 1991 on Personal Income Tax (the PIT Act) construed as  interpreting  “other  gratuitous  performance”  to  mean nothing  but  a  performance  resulting  in  an  enrichment of the employee the value of which may be determined in each particular instance, are consistent with Article 2 in conjunction with Article 217 of the Constitution. The above notwithstanding, the Tribunal also defined the circumstances in which the listed regulations apply.

According to the Tribunal, an employee will have received revenue if the performances it received:

  • were provided with the employee’s consent (i.e. when the employee availed him- or herself of them completely voluntarily);
  • were provided to serve the interests of the employee (and not the interests of the employer) and benefitted the employee in the sense that they added to the assets held by the employee, or spared the employee expenditures which he/she would otherwise have had to incur;
  • resulted in a quantifiable benefit, attributable to an individual employee (and was not made freely available to everybody).

It follows from the above that if other kinds of gratuitous performances are involved, which lack the tangible element of benefits provided to and used by the employee, the employee will not have achieved any taxable revenue.

Comment

The first conclusion that comes to mind when looking at this judgment of the Tribunal is that there can be talk of taxable enrichment on the part of the employee only when the employee accepts the performance provided by the employer in a fully voluntary manner.

It follows from this, in turn, that things like insurance policies, healthcare packages or company-provided transportation to and from the workplace will be  deemed sources of revenue under an employment relationship if: (i) the employee agrees to receive performances of this kind and as a result avoids having  to pay for what it receives, and (ii) a quantifiable benefit may be attributed to the given employee on an individual basis. There are also situations, however, in which it is relatively easy to demonstrate that a given performance was not in fact accepted voluntarily. Examples of such situations include participation in company meetings and conferences, trips to meet clients requiring overnights stays and meals (not being formal business trips, as is the case with trips by trade representatives) – all of which usually have a direct connection to the discharge of one’s company duties and serve the interests of the employer.

None of these situations can be seen as resulting in an enrichment of the employee such as would merit taxation of the amounts involved.

Given the position taken by the Tribunal, all employers would be well advised to review their systems of non- payroll employee benefits and identify any existing tax optimization opportunities and tax risks. It may also be worth seeking tax rulings to confirm that employees  will not in fact be required to pay any tax in connection with performances they are not obviously free to refuse (such as the mentioned company meetings or trade representatives’ trips).