Tax Highlights- Juli 2018-3
27 July 2018
TAXATION OF ENGAGEMENT OF A DIRECTOR WHO DOES NOT RECEIVE REMUNERATION BASED ON A CONTRACT ON MUTUAL RIGHTS AND OBLIGATIONS OF A DIRECTOR WITHOUT ESTABLISHING AN EMPLOYMENT RELATIONSHIP
The Ministry of Finance has issued Opinion number 011-00-1137 / 2018-04 of June 11, 2018, which refers to determining the tax treatment of the engagement of the director (who is not the founder or a member of the company), who has concluded a contract of rights and obligations without establishing an employment relationship on what basis he does not receive compensation. The above Opinion relates to the Opinion previously issued by the Ministry of Labor, Employment, Veterans' Affairs and Social Issues No. 011-00-406 / 2018-02 of 24 May 2018.
The Opinion prescribes that:
- Pursuant to Labour Law, director who has not established an employment relationship is entitled to remuneration for his work;
- the remuneration is to be deemed an obligatory element of the contract on mutual rights, obligations and duties of the director who has not established an employment relationship;
- no person can renounce the right to equitable remuneration for work;
- Consequently, for the director engaged on the basis of a contract on the rights and obligations of the director, without establishing an employment relationship in that company, there is an obligation to calculate and pay personal income tax on other income (at the rate of 20%) and the corresponding mandatory social security contributions (pension and disability insurance at a rate of 26% and health care insurance at a rate of 10.3% if it is not insured on another basis) on the basis of contracted remuneration.
- The basis for calculating the tax on other income and social security contributions is a contracted remuneration including a situation when the director renounces the contracted remuneration.
From the stated Ministry's position it can be concluded that it is necessary to calculate tax and contributions in a situation in which there is no payment of income or compensation to the director.
The aforementioned position is contrary to the provisions of the Personal Income Tax Law. Namely, the aforementioned Law prescribes that the withholding tax, for each taxpayer and for each individually paid income, is calculated, suspended and paid at the moment of payment of income.
Since in the case where the director does not receive remuneration for work, there is no payment of income, we consider that there is no basis for calculation of tax.
The issue of determining amount of remuneration for work is the subject of mutual relations between director and competent authoriy of the employer and are regulated by other legislature, specifically Labor Law.
Furthermore, having in mind that there is no prescribed minimum for determining the contracted remuneration for the work of the director, it could be interpreted that contracting a remuneration in a symbolic amount would be acceptable.