Ruling description

The Provincial Administrative Court in Gliwice found in its judgment of November 3, 2015 (case no. I SA/Gl 352/15) that when members of a supervisory board receive additional remuneration from transfers of certificates against consideration, this remuneration must be classified as revenue from activity carried on personally rather than as revenue from money capitals.

The taxpayer concerned sat on the supervisory board of a company which, in a bid to motivate members of both its management and supervisory board members to work better to improve the company's financial performance, invited them to participate in an incentive scheme. Agreements were concluded under which each participant in the scheme received a certain number of certificates at the beginning of an agreed settlement period. The certificates, distributed free of charge, were in book-entry (dematerialized) form and intended for eventual transfer to the company. The amount received in consideration of the certificates depended on the net profit achieved by the company in the given settlement period. The taxpayer held that the certificates were in fact derivative financial instruments in the meaning of the Act on Trade in Financial Instruments, emphasizing also that all the amounts received by the incentive program participants will have been an element of the remuneration paid to them as holders of their respective positions in the company. This interpretation was to follow from the applicable by-laws and the provisions of the documents appointing the board members to their positions.

The taxpayer applied to the Minister of Finance for confirmation that the revenue from the transferred certificates is to be classified as revenue from money capitals referred to in Articles 10(1)(7) and 17(1)(10) of the Act on Personal Income Tax. These Articles list revenue from the transfer against consideration of derivative financial instruments among other forms of revenue from money capitals. Revenue of this category is subject to PIT at the rate 19 percent.

The tax authority and later the Provincial Administrative Court (WSA) in Gliwice disagreed with the taxpayer. According to the WSA, the source of the certificates is the appointment relationship between the company and the taxpayer. In other words, had the taxpayer not been a member of the supervisory board, he would not have received the certificates. The court was in no doubt that the incentive program cannot be seen as involving any kind of hypothetical trade in certificates and that there can be no talk of any revenue earned in this kind of trade. As a result, the revenue from the transfer of the certificates must be deemed revenue from activity carried on personally (like the rest of the remuneration paid to members of the supervisory board) subject to taxation with personal income tax at the progressive rate of 18 to 35 percent. The WSA in Gliwice pointed out that the taxpayer himself admitted that all the amounts paid to him under the incentive scheme will be an element of his remuneration received for sitting on the supervisory board.

Comment

The judgment issued by the WSA in Gliwice cannot be seen as sound. To begin with, it is inconsistent with the fundamental rule of PIT taxation whereby the various sources of revenue listed in statutory law must be seen as distinct. This judgment is also out of line with the prevailing trend in court rulings. To date, courts tended to hold that income from incentive schemes based on derivative instruments must be treated separately from employees' income or managerial personnel's income. The judgment of the WSA in Gliwice may be the first of more judgments to come reversing the favorable approach taxpayers have been enjoying till now. On the other hand, it may also be that this judgment was prompted by the declaration made in the taxpayer's application for a tax ruling that all the amounts paid to him under the incentive scheme will be elements of his remuneration for sitting on the supervisory board. We recommend (as we have also done before) that our clients hedge the tax benefits under incentive schemes with tax rulings and continue monitoring developments in tax practice.

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