Free CIT benefits for a limited liability company

Service-Tax

In the initial period after establishing the company, partners often perform certain activities (services) themselves as part of savings. However, from the point of view of the tax authorities, such a free-of-charge service to the company may result in the company's obligation to pay tax, the amount of which will be determined on the basis of the "value" (market price) of the service provided. However, the question arises whether the services provided to the company by partners will be treated as free benefits in CIT, even if the articles of association oblige the partners to perform certain services free of charge for its benefit?

What are free CIT benefits?

In the light of Art. 12 of the Corporate Income Tax Act, free CIT benefits are one of the sources of income. The Act does not contain a definition of this phrase, so when trying to define it, one should refer to judicial and administrative judgments. Such a definition was quoted in the judgment of the Provincial Administrative Court in Gliwice of 5 May 2008, I SA / Gl 201/08, in which it was stated that:
"(...) the concept of" gratuitous benefit "under Article 12 (1) (2) of the CIT Act covers all economic phenomena and legal events in the activities of legal persons, which result in free of charge, i.e. not related to costs or any other form of equivalent , making an asset for that person with a specific financial dimension. (...) "

When analyzing the issue of free benefits under the CIT Act, some of their features can be indicated. They must always be unilateral and devoid of any form of equivalent. It is also worth paying attention to the feature of the benefit indicated in the name "free benefits", i.e. its free of charge - this is important because it indicates a certain specificity of income, i.e. no cost of obtaining it. When referring to the explanation of the concept of "gratuitous", one can use its dictionary wording: "gratuitous" can be translated as not requiring a fee; free. In order to be able to speak of a free benefit constituting a source of taxable income, a certain event must occur as a result of which one entity will make a specific benefit, while the other will receive this benefit free of charge.

Example 1.

Private Limited company. has four shareholders, one of which holds 55 shares and the rest of them 15. The value of the company's share capital is PLN 5,000.00. The function of the President of the Management Board is performed by a partner holding 55 shares. The company has no employees.

The articles of association contain a provision that the partners, for a period of 24 months from the date of its signing, are required to provide the company with recurring benefits in kind other than those resulting from holding the position of the president or member of the management board. These benefits have been defined separately for each partner.

The obligation of repeated benefits in kind specified in the articles of association applies to:

  • acquiring customers interested in the company's products and services,
  • sale of products and services offered by the company,
  • representing the company at trade fairs and industry meetings,
  • conducting marketing activities for the needs of the company,
  • designing, developing and testing software,
  • designing, programming, creating, testing electronic devices.

The articles of association state that the above-mentioned benefits in kind will be performed in accordance with the company's needs for given services, without remuneration for the partners for the activities performed at that time.

The above example shows free CIT benefits. The partners provide services to a limited liability company.free of charge (without receiving additional remuneration), thanks to which it gains benefits - acquires customers as a result of the actions of individual partners. The benefits listed in the articles of association are free of charge, unilateral (the limited liability company receives a benefit from the partners, but does not offer anything in return) and there is no equivalent on its part. The emergence of income from gratuitous benefits should always be considered when the taxpayer of corporate income tax receives goods or rights, other benefits or the possibility to use things or rights without the obligation to provide mutual benefit.

Free CIT benefits for a limited liability company and the articles of association

The Commercial Companies Code provides for certain rights and obligations of partners in a limited liability company. Regardless of such code rights and obligations, it is possible to contractually grant specific benefits or impose specific obligations. Therefore, anything that is not "special" or exceptional does not have to be reserved in the articles of association. The purpose of this may be, on the one hand, to encourage participation in the company, as well as to favor certain people, e.g. its founders. On the other hand, partners may impose obligations other than those normally borne by the partners. Pursuant to Art. 159 of the Commercial Companies Code (hereinafter: the Commercial Companies Code), if a partner is to be granted special benefits or if other obligations to the company are to be imposed on the partners, in addition to making contributions to cover the shares, it should be precisely defined in the articles of association under pain of ineffectiveness. . What does it mean? If it does not specify the duties that the partners must perform for the company, it cannot "force" the partners with any available means to perform additional services for the company. In connection with this provision, Art. 176 § 1 of the Commercial Companies Code, according to which, if a partner is to be obliged to provide recurring benefits in kind, the type and scope of such benefits should be specified in the articles of association.

How does the above apply to free benefits? When establishing a company, partners undertake in the contract or other act of incorporation to achieve a common economic goal (Art. 3 of the Commercial Companies Code). It is making a profit that the partners then share. In such a case, it may be wrong to say that since the partner in the partnership agreement undertakes to provide additional benefits free of charge, which in turn will pay off later, because the company will make a profit, in this case there will be no gratuitous benefits for the partnership, because the partner will receive equivalent, i.e. a part of the company's profit. By adopting this type of thesis, we are dealing here with an equivalent benefit and then we cannot recognize that we are dealing with a service free of charge, which should be classified as the company's income.

However, the tax authorities are of a different opinion. In accordance with the individual interpretation of the Director of the National Tax Information of April 19, 2018, 0111-KDIB2-2.40
"(...) the fact that the provision of services will result from the concluded agreement of the Company does not affect the tax consequences related to the fact that these services will be performed without remuneration. A partner in this relationship is treated as a third party to the company. the share of the partner in the possible profits of the limited liability company does not justify the failure to determine the income on its side due to the provision of services for it without remuneration. (...) "

In summary, if a partner of a limited liability company as part of the obligation under the articles of association, based on Art. 159 and art. 176 § 1 of the Commercial Companies Code, provides it with additional services (repeated non-cash benefits) without remuneration, it is a limited liability company. - in accordance with Art. 12 sec. 1 point 2 of the CIT Act - will receive free benefits subject to corporate income tax. Thus, the free performance for the benefit of the company by its partners of the services specified in the articles of association of a limited liability company, results in the company's creation of tax income from free benefits within the meaning of Art. 12 sec. 1 point 2 of the CIT Act.

The value of free benefits in accordance with Art. 12 sec. 6 point 4 of the CIT Act are determined on the basis of market prices used in the provision of services or the provision of items or rights of the same type and species, taking into account in particular their condition and degree of wear as well as the time and place of making available. As emphasized in the case law, the value of free benefits is determined by comparing transaction prices, in this case the costs of the service provided to a limited liability company. with market prices. The value of the benefit received free of charge is the saving measure for the recipient. And it is this saving that will be the basis for calculating the tax by the tax authority.

Pursuant to Art. 12 sec. 6 of the Corporate Income Tax Act - the value of benefits in kind, including free benefits, is determined as follows:

  • if the subject of the services are services falling within the scope of the economic activity of the service provider - according to prices applied to other recipients;
  • if the subject of the benefits are purchased services - according to the purchase price;
  • if the subject of the benefits is the provision of the premises - in the amount equivalent to the rent that would be payable in the event of concluding a lease agreement for this premises;
  • in other cases - on the basis of market prices used in the provision of services or the provision of items or rights of the same type and species, taking into account in particular their condition and degree of wear and the time and place of making available.

Free CIT benefits each time require an individual approach by the tax authority to a specific case. The claims that any provision of services to the company by a partner / partners will be treated as free of charge and will result in a tax obligation on the part of the company should be approached with great caution.