Management services provided by a management board member – does the management board need to pay the VAT?
December 20, 2017
So far, the members of the management board have had cooperated with the company that appointed them on various grounds. In the vast majority of cases, they cooperated on the basis of a civil law agreement for appointing the given persons to perform the management and inspection functions over the activities conducted. Another form of cooperation, was for the management board members to become sole proprietors. For a long time, that format worked both for the company and for the management board members.
Have there been any changes?
The answer to that question is positive. The breakthrough took place on 6 October 2017, when the general interpretation No. PT3.810L11.2017 was issued. In a letter to taxpayers, the Ministry of Finance explained that their sole proprietorships are not subject to VAT. It constituted interpretation of art. 15 sections 1, 2 and 3, point 3 of the VAT Act for the taxpayers generating the revenues on account of positions in decision-making bodies.
What is particularly significant is whether the proprietorships conducted (under art. 15 section 3 point 3) may be considered “performed independently” in connection with the activities listed in art. 13 points 2-9 of the PIT Act. Whether the conditions have been met, depended on meeting the following three criteria:
- performing the activities entrusted;
- remuneration;
- liability, of the party ordering the performance of activities, towards third parties
What conditions have to be met?
In its letter, the Ministry of Finance emphasized three basic issues that must be met in full for the management board members to avoid VAT taxation.
- The first conditions specified in the interpretation is the manner of performing the activities.
If the contractor (management board member), within the provision of a service, uses the technical devices, i.e. phone, computer, car, and is at the disposal of other resources owned by the company (principal), such activities may be considered as lack of independence for the purposes of the VAT Act. Similarly (based on provisions of the agreement), the use of the technical resources of a company by a management board member also seems to be an example of lack of independence. - Another stage of verification is remuneration. It boils down to determining whether a civil law agreement specifies a fixed remuneration. If such a provision is included in the agreement, it should be interpreted as lack of risk on the part of the contractor. That condition will also be met even if, apart from a fixed element, the remuneration includes a variable element, for example paid out on the basis of performance.
In its study, the Minister of Finance also described how that proportion should be perceived, i.e. the variable part may not be more than 50% of the remuneration. At the same time, that condition will also be met if the fixed part of the remuneration of the board members will be contingent, for example, upon the position of the company, the scope of tasks or upon awarding the annual bonus.
- The last condition is principal’s liability towards third parties. This means that if an agreement between two parties indicates that it is the contractor that bears the liability for the tasks entrusted, then the premise of independence (as defined in the VAT Act) will not be met. The result will be similar if the issue of liability has not been specified.
Therefore, if the contractor uses the infrastructure, tools and technical devices, if the remuneration under an agreement is fixed and if it is the principal that bears liability towards third parties, the board member may not be considered a VAT payer.
It should be emphasized that failure to meet any of the above-mentioned conditions will make the board member a VAT payer.
In every case, it is necessary to analyze the concluded agreements for performing the management activities in order to classify them properly and assess, for example, whether they meet the three basic conditions.
How to assess the interpretation?
The clarification of the conduct regarding VAT for management board members is positive news. This gives the taxpayers the guidelines for how to draw up agreements in order not to be exposed to negative consequences. On the other hand, the taxpayers will certainly need to be more vigilant, and in the cases of failure to follow the above rules, they will need to introduce adjustments. It should also be borne in mind that although the issue of the VAT tax has been explained, will the issue of the income tax be similar?
The taxpayers will certainly send questions for the purpose of getting an unequivocal answer in that regard.
