Annual bonuses are an increasingly effective tool for rewarding and keeping employees in jobs. But are they not an excessive tax burden?
"If you take care of your employees, they will take care of your customers," says Richard Branson, the founder of the Virgin Group and a valued British entrepreneur. It's hard to deny that statement. This was also seen by employers taking care not only of adequate remuneration but also of the incentive contribution. From various types of benefits in the form of Multisport cards and medical packages to additional retention bonuses or related financial performance of the company. This allows not only to convince the employee to stay in the company, but also attract the most valuable specialists. This is particularly important for a rapidly changing labour market.
The fall in unemployment makes it much easier for workers to find a suitable place of employment. However, the employer should not forget that taking care of the needs of his employees should also be taxed.
The annual bonus, due to the close closure of the accounting period, is now certainly the subject of many presidents' reflections. Not only for the determination of the appropriate amount of the allowance, but also for tax reasons. As a general rule, income payments constitute the cost of obtaining income.
This is due to the fact that the definition of the cost of obtaining income in income laws alone states: ‘The cost of obtaining revenue is the costs incurred in order to achieve revenue or to preserve or secure the source of revenue, except for the costs listed in Article 23” and ‘the cost of obtaining revenue shall be the costs incurred to generate revenue from the source of revenue or to preserve or hedge the source of revenue, except for the costs listed in Article 16(1)”.
The legislator shall lay down in that provision two the conditions for the cost of obtaining revenue:
* Positive – all costs incurred in order to achieve revenue or to secure the source of revenue,
* Negative – not disabled by Article 23 and Article 16(1) the relevant laws.
Only the fulfilment of both of these conditions makes it possible to qualify for the cost of obtaining revenue. Clearly, staff salaries, including additional bonuses, meet these criteria. Except for the case of bonus dependent on the company's performance. With this form of employee remuneration it is worth to stay longer.
Profit premium – interpretation doubts
Day 1 January 2018 entered into force of the amendment of the Act of 15 February 1992 on corporate income tax adding in Article 16(1) new point 15a. According to it, it does not include the cost of obtaining revenue from the ‘amounts paid as a breakdown of the entity’s financial result (net profit)’.
This was a response to taxpayers’ favourable jurisprudence by administrative courts, allowing the profit premium to be credited with revenue costs.
This is directly due to the wording of the explanatory memorandum to the Amending Act: ‘Because of the jurisprudence of the administrative courts in relation to the admissibility of the inclusion in the costs of obtaining the income of the rewards from the profit, it is desirable to introduce an expressis verbis provision in the CIT Act excluding the possibility to charge the revenue of any component of the profit of the company, regardless of its purpose’.
The case law mentioned in the statement of reasons is, among other things, a resolution of the composition seven Judges of the Supreme Administrative Court of 22 June 2015: „Since rewards are rewards, then there is nothing to prevent them from being paid after the end of the year to which they relate.
The follow-up to payment of remuneration for the work done is the norm, especially in the context of labour law. In summing up the above, it should be assumed that the linguistic wording of the provisions clearly indicates that expenditure on the payment of post-tax rewards is of a cost-effective nature.’
In analysing the current legal situation, it can be concluded that the payment of a profit-dependent premium to employees is not the cost of obtaining income. However, it is worth noting that Article 16(1)(15a) refers to the amounts paid for the distribution of profits. The tax law does not define what is the ‘distribution of the financial result (net profit) of an entity’ specified in the provision, so its meaning should be sought in legislation other than tax law, i.e. commercial law.
Article 191 The Code of Commercial Companies sets out the principles of participation in the profit of the company.
It states that: ‘The Community shall have the right to participate in the profit resulting from the annual accounts and intended to be distributed by resolution of the meeting of shareholders, taking account of the provision Article 195(1).” and ‘Unless the articles of association provide otherwise, the profits of the shareholders shall be shared in relation to the shares.’ In addition, the articles of association may provide for a different method of distribution of profits.
This means that the distribution of the financial result (net profit) of an entity is due to decisions taken by rightholders on the form of that division by means of a resolution.
Consequently, this may mean that the profit premium cannot be considered as the cost of obtaining income only if the distribution is decided by the partners in the resolution.
Profit premium — current case law
This proposal also appears to be confirmed by the tax authorities.
Director of National Tax Information in an individual interpretation from 30 May 2018, No 0114-KDIP2-2.4010.136.2018.2.JG explains: “A literal interpretation Article 16(1)(15a) The Corporate Income Tax Act leads to the conclusion that the exemption from the tax costs contained in that provision is subject to the amount paid for distribution of net profit rather than any expenditure.
... Using Article 16(1)(15a) The law on corporation tax, by the wording of ‘the amounts paid for the distribution of net profit’, excluded from the cost of obtaining revenue only those amounts from the net profit which are paid for its distribution, e.g. in the form of premiums, prizes or other forms of remuneration.
This provision does not cover situations where a single premium is solely based on a profit rate to be determined by the amount of that remuneration, and the source of such consideration for the employee or board of directors is the turnover of the Applicant.”
In the situation presented, the applicant asked about the future event. It provides on the basis of a cooperation agreement, accounting and tax advisory services.
The contract shows that the provider is entitled, in addition to the monthly remuneration, to a one-off or annual premium if the recipient achieves a defined level of profit in a given year.
The additional remuneration does not constitute a direct distribution of profit, but is calculated on the basis of the profit achieved for the year in question and the payment is made directly on the basis of the contract concluded.
The Director of KIS agreed with the applicant that the payment of such a remuneration allowance constitutes the cost of obtaining income.
Similar conclusions can be drawn from the interpretation of the individual Director of National Tax Information from 21 June 2018, No 0111-KDIB2-1.4010.117.2018.1.EN.
However, the control authorities are not obliged to adopt an interpretation expressed in an individual interpretation, but there are currently no indications of a different wording. Save Article 16(1)(15a) it appears to be, in the light of the above-mentioned interpretation of the Director of KIS, simple and clear enough not to give rise to disputes with tax authorities.
It is only in the next few months that we will see what the application of this provision will look like in practice. However, it seems that as long as the premium is paid on the basis of a net financial result, as a basis for its calculation, rather than on the basis of the distribution of the financial result, as at least at the payment of dividends, there should be no interpretational doubt in this matter.
Moment of recognition of premium costs
It is worth noting that “responsibility of the employment relationship constitutes the cost of obtaining income in the month for which they are due, provided that they have been paid or made available within the time limit resulting from the provisions of labour law, contract or other legal relationship between the parties (the accrual method).
In the event of a failure to comply with this deadline, they should be included in the cost of obtaining cash-in revenues, i.e. in the month of payment (making available).
Therefore, if bonuses or prizes are granted for a given month and are paid no later than until 10 on the day of the following month, they shall constitute the costs of the month to which they relate. In other situations, they are at the expense of the month in which they were paid.”
This means, for example, that if, under the agreement, the premium for March should be paid up to 10 April, This payment will be the cost of obtaining revenue in March and payment after the deadline, as early as April (or in another month of payment).
source: https://www.forbes.pl/opinie/premie-roczne-i-benefity-a-rozliczenia-podatkowe/nlss5vb
Author: Andrzej Dmowski
Lawyer and Doctor of Legal Sciences of the University of Warsaw. From 2011 one from Managing Partners in Russell Bedford Poland. Previously on the BDO advisory network, as well as Deloitte & Touche. Author of the book “Transfer Prices”, co-author of the commentary “The Corporate Income Tax Act”, author of many publications on tax law.