New Guidelines from Ministry of Finance Concerning Application of VAT to Company Management Contracts | SSW Tax Alert
Ladies and Gentlemen,
On 6 October, the Ministry of Finance issued a general interpretation as to how company management activities performed under civil law agreements (i.e. as contract work or under a managerial contract) are to be treated with respect to VAT taxation. The interpretation provides material details supplementing the limited VAT regulations in this respect, in the light of which such activities are not treated as freelance business activity and therefore are not subject to VAT, provided that the manager and the company have a legal relationship which defines the conditions for the performance of such activities, remuneration and liability of the party contracting such services towards third parties. The introduction of binding guidelines means the need for a review of the contracts between the management board members and companies in order to assess their compliance with the prerequisites set out in the interpretation and to verify whether the current classification (VAT taxable/non-taxable contract) is correct.
According to the newly issued interpretation, in case of a management contract, the above-mentioned conditions should be understood in the following way:
As regards the conditions of the performance of activities, management services carried out with the use of the infrastructure and internal organisation of the party for the benefit of which such services are provided is not considered business activity. This will apply specifically when the company (the entity under management) provides the manager, to the extent necessary for the performance of the management services, with access to technical infrastructure (e.g. computer, mobile phone, car, etc.) and, potentially, other resources in the possession of the company (e.g. office and equipment, participation in trainings and conferences strictly related to the performed function and responsibilities, company payment and credit cards, etc.).
As regards the remuneration, if the contract provides for fixed remuneration, or includes also a variable component depending on the performance of the company under management but the fixed component still accounts for a significant portion of the total remuneration, business activity is ruled out. In the light of the interpretation, the variable part should not exceed 50% of the base remuneration of the manager in the last financial year. Also, in case when the contract provides for fixed monthly remuneration for the manager at the level commensurate with the company’s position, scope of responsibilities, etc. and an annual bonus corresponding to a certain percentage of the profit generated in a given year, this does not mean that the manager is engaged in VAT-taxable business activity. What is more, in the light of the interpretation, the potential reduction of the remuneration in case when the performance of services is temporarily interrupted by the manager, in not considered a circumstance which should be relevant for the classification of the contract.
In terms of the contracting party’s liability, in order for business activity to be ruled out, the civil law contract should not provide for any liability of the manager towards third parties in respect of damages inflicted in connection the performed activity (i.e. the liability in this regard rests with the contracting party). According to the guidelines, in case when the manager’s liability is not defined in the contract, it cannot be implied. Neither may such liability be inferred from generally applicable legal regulations concerning management board members which are set out in e.g. the Commercial Companies Code.
Summing up, if the review of a given civil law contract (legal relationship) between the manager and the company demonstrates that all the three conditions described above are met, the manager cannot be considered a VAT taxpayer. At the same time, a failure to meet any of the conditions means that the manager is a taxpayer with respect to such tax.
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