The partner's spouse's remuneration and tax deductible costs

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Entrepreneurs running a business use the work of their relatives. In business activities, the spouses of partners are often hired to help. When operating in the form of a company, a situation may arise in which the spouses of partners work in it. Is the partner's spouse's remuneration tax deductible?

Tax deductible costs - definition

Pursuant to Art. 22 sec. 1 of the Act of July 26, 1991 on personal income tax (i.e. Journal of Laws of 2018, item 200, as amended), hereinafter referred to as the "CIT Act", tax deductible costs are the costs incurred in in order to achieve income or to maintain or secure the source of income, with the exception of the costs referred to in article 1. 23 sec. 1 of this act.

Thus, tax deductible costs are all rational and economically justified expenses related to the conducted business activity. In connection with the conducted activity, it should follow that the incurred expenditure may objectively contribute to the achievement of revenues from a given source. Therefore, in order for an expense to be considered a tax deductible cost, it should, in accordance with the provision referred to above, meet the following conditions:

  • be in a causal relationship with the income or source of income and be incurred in order to achieve income or to preserve or secure the source of income,

  • not be on the list of costs not recognized as tax deductible costs referred to in article 1. 23 sec. 1 of the Personal Income Tax Act,

  • be properly documented.

Personal companies within the meaning of the Commercial Companies Code

Pursuant to the provision of Art. 4 § 1 point 1 of the Act of 15 September 2000, Code of Commercial Companies (Journal of Laws of 2016, item 1578, as amended), hereinafter referred to as the Code of Commercial Companies, a partnership is a general partnership, partnership , limited partnership and limited joint-stock partnership.

General partnership - income

Pursuant to art. 22 of the Commercial Companies Code, a general partnership is a partnership that runs an enterprise under its own name, and is not another commercial company. Each partner is responsible for its obligations without limitation with all his assets, jointly and severally with other partners and with the company, taking into account Art. 31.

A partnership is a commercial law company that does not have legal personality. However, it has legal personality, which means that it can acquire rights and incur obligations on its own behalf. It may also have its own property, separate from the property of its partners.

Income of companies which are not legal persons is not a separate subject of taxation. It is, however, subject to the income of individual partners of such a company. The method of taxing income from participation in a company that is not a taxpayer of income tax depends on the civil law status of a given partner. If a partner in a general partnership is a natural person, the income from participation in it will be subject to personal income tax.

Pursuant to Art. 8 sec. 1 of the PIT Act, revenues from participation in a company that is not a legal person, joint ownership, joint venture, possession or use of things or property rights in each taxpayer shall be determined in proportion to his right to participate in profit (share) and subject to paragraph 1A, connects to other income from sources from which the income is taxable according to the scale referred to in article 1. 27 sec. 1. In the absence of evidence to the contrary, it is assumed that the rights to profit participation (share) are equal.

The rules expressed in sec. 1 shall apply mutatis mutandis to the settlement of tax deductible costs, non-tax deductible expenses and losses (Article 8 (2) (1) of the above-mentioned Act).

Whereby, pursuant to Art. 5a point 26 of the above-mentioned of the Act, whenever the Act refers to a company that is not a legal person, it means a company that is not a taxpayer of income tax.

When remuneration is not a cost

It should be remembered that not all expenses are tax-deductible, but only those that are not listed in Art. 23 and the incurrence of which is causally related to obtaining income from a given source or maintaining or securing the source of income.

The catalog of exclusions from the category of tax deductible costs contained in Art. 23 sec. 1 of the PIT Act is closed. Pursuant to this provision, the following are not considered tax deductible costs:

  • unpaid, unfinished or not at the disposal of payments, benefits and other receivables from the titles referred to in article 1. 12 sec. 1 and 6, art. 13 points 2 and 4-9 and in art. 18, cash benefits for graduate internships, referred to in the Act of 17 July 2009 on graduate internships (Journal of Laws No. 127, item 1052), as well as cash benefits from social insurance paid by the workplace, subject to Art. 22 sec. 6ba (Article 23 (1) (55));

  • unpaid contributions to the Social Insurance Institution, subject to point 37 and art. 22 sec. 6bb, specified in the Act of 13 October 1998 on the social insurance system, in part financed by the contribution payer (Article 23 (1) (55a)).

The first of the above the exemptions concern, inter alia, remuneration from the employment relationship as receivables referred to in art. 12 sec. 1 of the PIT Act in question. Thus, in accordance with the rule resulting from Art. 23 sec. 1, paragraph 55, remuneration from the employment relationship does not constitute a tax deductible cost, if it has not been paid, made or made available. A contrario, the cost of income is paid, made or made available remuneration under the employment relationship. An exception to the above rule is introduced in Art. 22 sec. 6ba, according to which the unpaid or not made available remuneration from the employment relationship due for a given month may be recognized as a tax deductible cost in that month (i.e. in the month for which it is due), provided that it is paid or made available on time resulting from the provisions of labor law, contract or other legal relationship between the parties.

The provision of art. 23 sec. 1 point 55a of the PIT Act excludes from the tax-deductible cost category the value of unpaid charges borne by the taxpayer as a payer of social security contributions, i.e. the value of unpaid social security contributions, which, in accordance with the provisions of the Act on the social insurance system, the contribution payer finances from his own funds . On the contrary, the rule is that the tax deductible costs are paid social security contributions, which the payer is obliged to finance from his own resources. The exceptions to the above rule provide for:

  • art. 23 sec. 1 point 37 of the PIT Act, excluding from tax costs, inter alia, social security contributions on prizes and bonuses, paid in cash or in securities from income after taxation with income tax;

  • art. 22 sec. 6bb of this Act, according to which, subject to Art. 23 sec. 1 point 37, inter alia unpaid social security contributions for remuneration under the employment relationship in the part in which the obligation to finance them rests with the contribution payer, can be counted as tax deductible costs in the month for which the remuneration for which the contributions are calculated is due, provided that payment is made these contributions within the time limits specified in the provision.

Compensation of the partner's spouse - exclusion of the spouse's work from tax deductible costs

In the light of Art. 23 sec. 1 point 10 of the PIT Act is not considered to be tax deductible costs of the taxpayer's own labor value, his spouse and minor children, and in the case of conducting business in the form of a company that is not a legal person, also the spouses and minor children of partners.

According to the above-mentioned regulations in the case of conducting business in the form of a company that is not a legal person, the following are excluded from tax deductible costs (as a partner in a general partnership):

  • the value of the taxpayer's own work;

  • the value of his spouse's and minor's own labor;

  • the value of own labor of the spouses and minor children of the remaining partners.

The regulations do not specify what, for the purposes of the above regulation, should be understood as value of own labor. However, it should be assumed that this concept means the value of all kinds of work inputs provided by entities mentioned in the provision in question. It does not matter whether the work is performed on the basis of an employment contract, a civil law contract having the nature of a mandate contract or a specific specific task contract (except when the contract was concluded with a person conducting business activity as part of his business) or without a contract.

The value of own work should be understood as the value of the costs incurred by the employer related to the received employee's contribution (e.g. value of remuneration components for work). However, this concept does not include additional benefits for the employee, independent of the level of the employee's contribution. The scope of the analyzed concept also does not include expenses incurred in connection with the received work performance, which are not equivalent for this work (e.g. social security contributions in the part in which the employer is obliged to pay them).

Thus, the value of the spouse's work does not constitute a tax deductible cost for one of the partners.

Will the costs related to the employment of the spouse of one of the partners be the costs of the other partners of the partnership?

At the outset, it should be emphasized that the provision of Art. 23 sec. 1 point 10 of the Personal Income Tax Act provides for the prohibition of recognizing the value of the partner's spouse's work as tax deductible costs, regardless of the form of work performed by him (contractual or non-contractual).

The value of work is therefore the agreed (gross) remuneration for work with all its components, i.e. social and health insurance contributions paid by the employee, advance on personal income tax and physically paid remuneration, as well as all kinds of bonuses, awards and other benefits paid in connection with the work performed by an employee.

It should also be noted that the provision of Art. 23 sec. 1 point 10 of the PIT Act clearly mentions "partners" in the plural, and not "partner", therefore the exclusion from the possibility of recognizing the work value of a spouse of one of the partners as tax deductible costs applies to all partners of a company that is not a legal person.

The above is confirmed by the interpretation of the Tax Information Director of November 17, 2017, number 0115-KDIT3.4011.274.2017.1.AK:

Thus, the value of the remuneration paid to the spouse of the "first" partner together with all its components is not a tax deductible cost for all partners of the company, pursuant to Art. 23 sec. 1 point 10 of the Personal Income Tax Act. Therefore, one cannot agree with the position of the Applicant that the value of the work of the Partner's spouse will be a tax-deductible cost for the Applicant.

On the other hand, social insurance contributions related to employment under the employment contract of the spouse of the first partner in the part in which the employer - general partnership is obliged to pay them, constitute tax deductible costs for the Applicant, but not in full, but determined in proportion to the Applicant's possession. share in the company's profits, pursuant to the quotation of art. 8 sec. 2 point 1 of the Personal Income Tax Act.