Value of the work of the taxpayer and his spouse and children

The list of exemptions from the cost of obtaining income provides for an exemption for the value of the work of the taxpayer, his spouse and minors 1 (and the spouse and minor children of a partnership partner).

This limitation is due to Article 23(1)(10) Act on 26 July 1991 on personal income tax 2 (further u.p.d.o.f.) and z Article 16(1)(13c) Act on 15 February 1992 on corporate income tax 3 (Come on. the Corporate Income Tax Act). It is worth noting that starting with 1 January 2019 this regulation has changed significantly.

Namely, the total exclusion from the cost of obtaining income in relation to the work of the taxpayer's spouse and his minors' children (as well as the spouse and minors' children of the partnership's partner) was replaced by a partial restriction. That means turning the rule around, i.e.

in the current state of the law, tax rules allow the tax costs of the employment costs of the nearest taxpayer to be included, but provided that such employment takes place on the basis of legal relations laid down in the legislation.

1. Value of the taxpayer’s own work

As a general rule, the cost of obtaining revenue is the economic expenditure financed by the taxpayer's assets. Therefore, the expenditure should be borne by an entity other than the taxable person himself wishing to include that expenditure in his tax account.

The value of the work of the taxpayer itself does not meet the definition of expenditure, as it is not an expenditure ‘carryed’ to someone else. Moreover, this is not a cost other than that actually incurred, in respect of which tax rules would provide for the possibility of including them in the tax account.

Therefore, a taxable person who is a natural person cannot ‘value’ his work and take into account the value of that work into account in the cost of obtaining income from his business. Nor can he pay his own wages for his work because he cannot conclude a contract with himself.

To avoid doubt, the legislator directly regulated the matter under Article 23(1)(10) u.p.d.o.f. The wording of this provision expressly prohibits the inclusion in the costs of obtaining income of the value of the taxpayer's own work.

The aim of this regulation is to eliminate a situation where tax costs would be set by taxpayers in a highly subjective manner and thus similar to the real costs of the work in question. It was assumed that the purchase of a given service from an external entity (e.g.

the cost of labour in the form of remuneration for work provided by unrelated persons or the cost of services provided by other entrepreneurs) was determined under the market conditions in the locality concerned and in the context of the realities in question, and thus in a manner which can be verified in terms of marketability.

On the other hand, if taxpayers were to be able to charge their own work for tax costs, there would be a risk that these costs would be set too freely, in such a way as to prevent tax authorities from verifying the reality of these costs.

Although the legislature has softened from 1 January 2019 the provisions relating to the cost of employment of the taxpayer's spouse and his minors, but did not decide to change the value of the taxpayer's work. Therefore, the value of the work of the taxpayer itself cannot constitute a tax cost.

In the judgment of 10 January 2019 4 The NSA has confirmed that the ban on taking into account in the cost of obtaining own labour income also applies to the situation where the cost of this work is covered by a grant received by a taxable person conducting an economic activity and having a certain professional function (the director of a kindergarten).

2. Value of the taxpayer’s own work as a partner in a partnership

Limiting the possibility to charge the income of the taxable person carrying out individual economic activities, although it may seem unfair to taxpayers themselves, does not raise any particular interpretational doubts. However, some questions may arise in the situation of conducting business activity in the form of a personal company.

It should be recalled here that according to Article 8(2) u.p.d.o.f. the cost of obtaining revenue and expenditure not constituting the cost of obtaining revenue in a company not a legal person shall be determined in proportion to its right to participate in profit.

An analogous rule is due to Article 5(2) the Corporate Income Tax Act in respect of shareholders of partnerships who are legal persons.

This means that certain costs incurred for the benefit of a personal company, if they meet the definition of the tax cost of obtaining revenue, become the costs of obtaining income from the business activities carried out by each of the shareholders of that company, respectively, in corporate income tax (when the partner is a legal person) and personal income tax (when the partner is a natural person).

This follows that the participation of each of the partners in a personal partnership is considered to be a form of business activity, each of which is accounted for individually, independently of the other shareholders of that company, and according to those provisions Article 8(1) U.p.d.o.f.

and Article 5(2) the Corporate Income Tax Act This cost should be allocated to the individual partners.

While it is clear that an individual partner cannot be included in its costs of obtaining income from the costs of his own labour in a company, the question arises as to whether the cost of his own labour can be taken into account as the costs of obtaining income from the other shareholders of that company.

Only in relation to a partner who is a legal person is there a clear provision that such a cost cannot be included in the cost of obtaining the income of that legal person. This is due to Article 16(1)(13c) the Corporate Income Tax Act, which refers to the value of the work of its own partner as a natural person in a personal company.

However, no provision in u.p.d.o.f. explicitly excludes, in relation to partners who are natural persons, the possibility to charge to their costs the income of the value of the work of another partner, who is a natural person.

In the absence of such a prohibition, it should be considered that there is a possibility that such a cost would constitute the cost of obtaining the income of other natural persons’ shareholders on general terms.

The condition for crediting such a cost is only that there is a legal basis under which payment is made for the activities performed by such an associate. This position is e.g. based on an interpretation of the individual Director of KIS from 14 December 2018 5

The relationship between the shareholder and its company in which the shareholder performs certain activities on the basis of a contract of employment or civil law should be distinguished from the situation where the partner acts in a relationship as an entity conducting a separate business activity.

No tax provision excludes from the tax costs of a passenger company the costs resulting from the payment to such a partner (as a separate trader) for services rendered.

Consequently, the costs of the company for payment to such a shareholder of remuneration for services will constitute the costs of obtaining the income of all its shareholders (both natural persons and legal persons) in proportion to the share in which each of them participates in the profits of that company, including the partner who performs these services.

This position confirms a number of tax rulings.

Tax Interpretation of Director of KIS of 6 November 2018 6

It should be noted that, where a partner of a limited partnership provides services to that company, as a separate self-employed entity, transactions with that company are carried out on the basis of a legal link between two separate economic operators. The provisions of u.p.d.o.f.

do not provide for restrictions on the possibility of concluding contracts between separate economic operators in which the same natural person conducting individual business activities provides services to a limited partnership in which he is also an associate.

The mere fact that a partner of a limited partnership is the same person who provides services to the company does not prevent the expenses of obtaining the income of the shareholders of the limited partnership from the acquisition of services from the partner, provided by him in the course of his individual business activity.

In the case under consideration, the applicant’s provision of services will be based on a legal relationship (civil contract) connecting two separate economic entities – Applicant (as an individual business operator) and Company. Therefore, the provision of services in the framework of non-agricultural business cannot be regarded as own work within the meaning of the provision. Article 23(1)(10) u.p.d.o.f.

A similar approach is based, for example, on an interpretation of the individual Director of KIS from 10 May 2019 7 .

This position follows that the value of ‘own work’ in question under Article 23(1)(10) u.p.d.o.f., only the value of the work performed by the partner in person shall be understood, within the framework of civil law relations concluded with natural persons outside the economic activities of that partner, such as employment contract or civil law contracts (e.g.

contract-order or contract-for-work), as well as work performed without contract. The value of self-work in this sense, on the other hand, is not carried out by a partner in favour of the company in the course of the business of that partner.

Example

Public company has third partners: partner A is a company with an o.o. and partners B and C are natural persons. A one-off contract was concluded between the company and shareholder C for the provision of value advisory services 9,000 PLN, related to the attempt to start sales abroad. In addition, Partner B operates a single-person business not related to the company’s activities, which subcontracts the premises to the company’s headquarters at a price 1,200 PLN net per month.

Tax revenues and the costs of obtaining the revenue of a public company as a transparent tax entity shall be attributed to individual shareholders in proportion to their share of the profit of that company.

This principle follows from Article 5(1) the Corporate Income Tax Act (for shareholders who are taxable corporate tax) and, respectively, Article 8(1) u.p.d.o.f. (for shareholders who are taxpayers of personal income tax). Thus, the standard cost in the public company is the partial cost of the company with the o.o.

and the partial tax cost of shareholders who are natural persons in proportion to the share of each of them in the profits of the company.

Both A and C partners and B partners may include in their cost of obtaining the revenue incurred by the company the cost of renting the premises leased by the B partner.

Assuming that the share of each of these shareholders in the profit of the company is equal and that the articles of association do not provide for other provisions, each of them shall consider as a tax cost in its tax settlement after 400 PLN the net monthly tax cost for renting the premises.

In addition, partner B in the tax settlement of its individual business activities will show tax revenue of 1,200 PLN net per month, i.e. the amount of remuneration for renting the premises.

The cost of remuneration paid to partner C under the contract-order will only be taken into account by shareholder B and only in part, which corresponds to its share of the profit of the company (i.e. 3,000 PLN assuming a level playing field in the company’s profit).

Partner C will not be able to recognise such a tax cost as the work carried out represents the value of own work within the meaning of Article 23(1)(10) . u.p.d.o.f. Partner A will not be able to recognise such a tax cost due to the exemption provided for under Article 16(1)(13c) the Corporate Income Tax Act

In conclusion, it must be concluded that:

1. the cost of the work of a natural person’s own partner (under the terms of work performed outside of business) in a passenger company does not constitute the cost of obtaining the income of that partner,
2. the cost of the work of the partnership's own partner shall be the cost of obtaining the income of the other shareholders who are natural persons, subject to the conclusion of an agreement between the company and that partner which is the legal basis for such a relationship,
3. the cost of the work of the own member of a personal company who is a natural person in a personal company does not constitute the cost of obtaining income from the partner of that legal person, as a result of exclusion from Article 16(1)(13c) the Corporate Income Tax Act,
4. the cost paid to the shareholder in respect of the services rendered by him to the personal company, in which he is himself a shareholder in the course of his business, is at the expense of obtaining income from the company in both the share of the partner and the proportion of the other partners (being natural persons and legal persons).

It is worth noting here that the limitations resulting from self-work only concern the functioning of a natural person in a personal company, i.e. one that has no legal personality and thus is not a separate income tax tax tax from its shareholders. The restriction does not apply to commercial law companies having legal personality (i.e.

a limited liability company, a simple limited liability company and a limited liability company (which, although not having legal personality, is a corporation tax taxpayer), as well as other entities with legal personality and corporate income tax (e.g. cooperatives, foundations or associations).

Therefore, the costs incurred by those companies (and, respectively, the other legal persons) to their shareholders (and, respectively, members of cooperatives, foundations or associations) may constitute the costs of obtaining the revenues of those entities on general terms resulting from the Article 15(1) the Corporate Income Tax Act In practice, apart from the requirement to have a link between the cost incurred and income, or at least to maintain or secure the source of revenue, this comes to the requirement that an agreement exists between the company and its shareholder, which is the legal basis for the relationship between them, which generates the cost on the part of the company.

3. Cost of work of the taxpayer’s spouse and his minors

3.1. Legal status 1 January 2019

In addition to the taxpayer's own work, the value of the work of his spouse and minors is excluded. However, while in the past there has been a total ban on the costs of obtaining income from the labour costs of the taxpayer's spouse and his minors, incurred in any way, 1 January 2019 The provisions were relaxed – the legislator allowed the taxpayer to account for the cost of obtaining the revenue of certain costs associated with the employment of this group of closest persons.

As a result of the amendment introduced by the legislation Article 7(9) Act on 9 November 2018 amending certain laws to introduce simplifications for entrepreneurs in tax and economic law 8 (Further: Amending Act, introducing simplification for entrepreneurs) to date Article 23(1)(10) u.p.d.o.f. has been modified. From 1 January 2019 at the expense of obtaining revenue, the following remuneration may be paid by the taxable person to his closest:

• 1) specified under Article 12(1) u.p.d.o.f. (from employment relationship and related relations),
• 2) specified under Article 13(2), 8 and 9 u.p.d.o.f. (with works contracts, contracts-orders and several other types of revenue from activities performed in person),
• 3) for the completion of the alumni practices referred to in the Act of 17 July 2009 about alumni practices 9 (Next: u.p.a.).

The introduction of a closed catalogue of legal bases, of which the remuneration paid to the nearest taxpayer may constitute the cost of obtaining revenue, means that the remuneration paid on the basis of other legal bases cannot be such a cost.

The limitation of tax costs to the value of the work of the spouse is not dependent on the existence of a business relationship between the spouses.

Consequently, also where a property separation agreement has been concluded between the spouses, the value of the work of the taxpayer's spouse — if the cost of his work is documented by a contract other than that specified above or his work has not been documented at all — is not the tax cost of the taxpayer's employer.

Those provisions shall apply subject to the provisions Article 23(1)(55) and Article 22(6ba) u.p.d.o.f., which means that the taxpayer, when examining the costs of obtaining revenue from the above titles, should apply general rules specifying the timing of the recognition of these costs, as in the hiring of unconnected persons. According to the justification for the draft amending law introducing simplification for entrepreneurs, the taxpayer may include social security contributions (employee, pension and accident) and contributions to the Labour Fund and the Guaranteed Workers' Benefits Fund in the part paid by the employer (if the employer is obliged to pay them for the employees employed).

As regards the spouse of the taxpayer and his minors, the concept of self-work should be understood as regards the labour costs of the partner himself. It is therefore a work carried out in person, within the framework of civil law relations concluded with natural persons who are not entrepreneurs. In the case of a spouse and minors, support for the activities of a taxable person carried out free of charge without any legal basis, and only as part of the family's assistance, should be included.

The value of self-work in this sense, on the other hand, is not the cost borne by the taxable person himself or by the company in which the taxable person is a shareholder, for the activities performed by the spouse of that taxable person on the basis of economic activity.

This is then the cost of the taxpayer to another trader, which may be included in the cost of obtaining revenue on general terms. The costs resulting from cooperation between spouses' companies may therefore constitute the costs of obtaining the income of each of them on general terms, despite their relationship.

The spouses then appear as separate economic entities. Each of them must show in their individual tax account the costs and revenue for this cooperation respectively. This is confirmed by a number of tax rulings of the Director of KIS 10 .

It should be borne in mind that tax rules on transfer pricing require that market relations between closely related persons be maintained (Article 23o(1) u.p.d.o.f.).

This applies only to the spouse of the taxpayer and his minors.

Therefore, the remuneration paid to children of adults, other members of the taxpayer's family than those who have been specifically specified under Article 23(1)(10) u.p.d.o.f., and persons with a taxpayer in informal relationships may be at the expense of obtaining income on general terms, including in respect of remuneration paid in accordance with any other legal basis.

Such expenditure must only meet the general condition that it can be included in the cost of obtaining revenue according to Article 22(1) u.p.d.o.f. Article 15(1) the Corporate Income Tax Act

3.2. Specific remuneration under Article 12(1) Personal Income Tax Act

Article 12(1) u.p.d.o.f. refers to a wide range of relations generating the tax revenue of a natural person, i.e.:

• 1) business relationship,
• 2) employment relationship,
• 3) Overlay work,
• 4) a cooperative employment relationship.

Allowing the income of employment costs to be charged on the basis of the above-mentioned legal relations of the taxpayer's spouse or his minors means in practice that, in most cases, from 1 January 2019 – such expenditure will constitute revenue costs. The taxpayer must only ensure that employment is carried out on the basis of the formal agreements concluded with the above legal titles.

3.3. Specific remuneration under Article 13(2), 8 and 9 Personal Income Tax Act

Provision Article 13(2) u.p.d.o.f. refers to:

• 1) revenue from personal artistic, literary, scientific, coaching, educational and publicist activities, including participation in competitions in the fields of science, culture and art and journalism,
• 2) revenue from sports activities, sports scholarships awarded on the basis of separate rules and the revenue of judges for the conduct of sports competitions.

In turn Article 13(8) u.p.d.o.f. deals with revenues from the provision of services, on the basis of a contract-order or a contract for a work, obtained exclusively from:

• 1) a natural person conducting an economic activity, a legal person and its organisational unit and an organisational unit not having legal personality,
• 2) the owner(s) of the property in which the premises are rented, or the manager or administrator acting on his behalf, if the taxable person provides these services exclusively for the purposes of that property,
• 3) companies in decline.

Provision Article 13(9) u.p.d.o.f. relates to revenues obtained under management contracts, management contracts or similar contracts, including revenues from such contracts concluded in the framework of non-agricultural business activities carried out by the taxable person.

By extending the possibility to include in the cost of obtaining the income of spending on the remuneration of the spouse or his minors on cases of personal activity by them, the legislator met the expectations which were due to the practice.

The application of such contracts as, for example, a contract or a contract for a work is a common commercial solution.

3.4. Remuneration for alumni practices

The Graduate Practices Act regulates the rules for high school graduates and primary schools to gain experience and acquire the practical skills necessary to perform their work. The practice may be paid or free of charge. Where it is paid, the remuneration shall be paid to the apprentice in accordance with Article 3(2) u.p.a.

1. Value of the work of the spouse and minor children of a partner in a partnership

Provision Article 23(1)(10) u.p.d.o.f. also refers to the question of the value of the work of spouses of partnerships and their minors. The remuneration paid to persons in that circle shall be limited only to salaries derived from a specific legal basis, similar to those specified above, relating to the spouse of the taxable person and his minors. A partnership of a passenger company may therefore include, as a result of the distribution of the company’s costs, the remuneration paid to the spouse of the other partners or their minors from the titles of:

• 1) remuneration arising under Article 12(1) u.p.d.o.f. (from an employment relationship and related relations),
• 2) remuneration arising under Article 13(2), 8 and 9 u.p.d.o.f. (from contracts for work, contracts of mandate and other income from activities performed in person),
• 3) conducting the alumni practices referred to in u.p.a.

Similar restrictions apply to – by virtue of Article 16(1)(13c) the Corporate Income Tax Act – shareholders of partnerships that are legal persons. They may not include in their costs the revenue of that part of the expenses incurred for the employment of spouses or minors of other members of that company who are natural persons on a basis other than those mentioned above.

Example

Public company has third partners: partner A is a company with an o.o. and partners B and C are natural persons. The public company employs partner B's spouse for the employment contract.

Both natural and legal persons (shareholders B and C) and legal persons (shareholder A) may include among their costs of obtaining revenue from the company the remuneration costs resulting from the employment of the spouse of the partner. B being a natural person, in part per individual.

However, it is only possible if it is a remuneration for the employment or related relationship, for activities performed in person (e.g. contract-orders) or possibly for the performance of alumni practices. Otherwise, i.e.

If the costs of this work were incurred on the basis of a contract other than those mentioned above (or if they were incurred without any legal basis), they could not be the costs of obtaining income either in part per partner B or in part per other partners: partner C (being a natural person) and partner A (being a legal person).

As with the labour costs of the partner himself, the concept of self-work should be understood in the same way to the spouse of the taxpayer and his minors. It is therefore a work carried out in person, within the framework of civil law relations concluded with natural persons who are not entrepreneurs.

In the case of a spouse and minors, support for the activities of a taxable person carried out free of charge, without any legal basis, and only as part of family support should be included.

The value of self-work in this sense, on the other hand, is not the cost borne by the taxable person himself or by the company in which the taxable person is a shareholder, for the activities performed by the spouse of that taxable person on the basis of economic activity.

5. Legal status applicable to 31 December 2018

In the legal state applicable to 31 December 2018 recipe Article 23(1)(10) u.p.d.o.f.

provided for the total exemption from tax costs of the tax value of the taxpayer's work, the value of the work of the taxpayer's spouse, the value of the work of minors of the taxpayer's children, and, in the case of a business activity in a company which is not a legal person, the value of the work of the spouses of the young children of its shareholders.

Likewise Article 16(1)(13c) the Corporate Income Tax Act provided for the total exclusion from the costs of obtaining the income of a member of a partnership who is a legal person, the value of the work of the taxable person who is a natural person, and his spouse and minors.

However, in the previous legal situation, it was considered that the restriction does not apply to the remuneration for services provided in the course of business, even when it was a remuneration for services performed between spouses.

Consequently, the costs incurred in favour of the economic activity of the taxpayer’s spouse, resulting from the invoices issued by him, were the costs of obtaining income from the taxable person conducting the individual economic activity, as well as the costs of obtaining income in part of the profits of the personal company in which he was a shareholder.

Moreover, the reduction of tax costs in relation to the work value of the spouse was not dependent on the existence of a business relationship between the spouses.

Consequently, also where a property separation agreement was concluded between the spouses, the value of the work of the taxpayer's spouse was not at the tax expense of the taxpayer's employer.

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1 According to Article 10 Act on 23 April 1964 Civil Code (i.e. Journal of Laws of 2019, item 1145) is the adult who graduated 18 years. Legality can also be achieved by marriage (essentially only for women who, with the agreement of the court, according to Article 10 Family and Care Code Act (i.e. Journal of Laws of 2019, item 2086) – may marry after the age of 16).

2 i.e. Journal of Laws of 2019, item 1387 as amended

3 i.e. Journal of Laws of 2019, item 865.

4 reference no. II FSK 981/18, Legalis.

5 reference no. 0115-KDIT3.4011.448.2018.2.JŁ, Legalis.

6 reference no. 0112-KDIL3-3.4011.291.2018.2.MM, Legalis.

7 reference no. 0115-KDIT3.4011.125.2019.1.DP, Legalis.

8 Journal of Laws of 2018, item 2244.

9 i.e. Journal of Laws of 2018, item 1244.

10 e.g. from 16 October 2018, reference no. 0114-KDIP3-1.4011.450.2018.1.EC, Legalis and from 7 September 2018, reference no. 0114-KDIP3-1.4011.435.2018.1.EC, Legalis.