On 26 April 2010 seven judges of the Supreme Administrative Court of Poland in Warsaw (file No. II FPS 10/09) resolved that the income of partners referred to in Art. 5b Section 2 of the Personal Income Tax (PIT) Act that is earned after 1 January 2008 from participation in a registered partnership earning income on the basis of enterprise management contracts, management contracts or contracts of a similar nature is not subject to the flat tax stipulated in Art. 30c Section 1 of the PIT Act.
Rules of Taxation of Managers’ Compensation
Managers’ compensation is the income from activity performed personally and subject to taxation at a given tax rate (either 18 percent or 32 percent). It is not possible to tax such income pursuant to the rules specified for business activity even in the situation where the manager pursues his own business activity.
For some time, the best way to minimize the costs of managers’ activity was considered to be partnerships (that is, registered or limited partnerships) incorporated by at least two managers. Compensation earned by partners on the basis of management contracts was taxed as the income from business activity. Therefore, a 19 percent flat tax could be charged on the income earned through participation in a partnership.
Such a model was accepted by tax authorities and voivodeship administrative courts. However, positive rulings have been challenged recently by tax authorities, and one of those cases was referred to the Supreme Administrative Court.
Consequences of the Ruling
The Supreme Administrative Court explained its ruling on the grounds that it is the manager who is responsible for the effect of services he provides and that he manages his business himself even if he relies on the support of other persons. The same situation will occur if the manager is a member of a partnership. Taxation of the income earned from such activity is on the level of a partner. The partnership is neutral in terms of taxes. Thus, such income is the income from activity pursued personally (Art. 13 Section 9 of the PIT Act).
The resolution of the court’s seven judges arouses controversy and may cause technical problems in settling compensation for management. Managers and persons managing businesses will certainly seek new solutions allowing them to minimize the costs of their activity including tax charges.