Remuneration of a management board member in a foreign company and the issues related to personal income tax and social insurance

From this article you will learn:

• How serving as a management board member in a foreign company affects your PIT settlement?
• How to determine the place of collecting social security and health insurance contributions?

It may happen that a Polish tax resident who is employed in a foreign entity (or is a management board member in a foreign company) will be obliged to settle their taxes both in Poland and abroad. In order to reduce the tax burden, we should always check whether in a given case we can apply any of the methods of avoiding double taxation resulting from a relevant international agreement.

Member of the management board in a foreign company – where should taxes be paid?

In principle, natural persons who have their place of residence in Poland (Polish tax residents) are subject to tax obligation in Poland on all their income, regardless of the place where its source is located. 

Polish tax residents are persons who:

• have a center of personal or economic interests in the territory of the Republic of Poland (the so-called center of vital interests), or
• stay in the territory of the Republic of Poland for more than 183 days in a tax year.

The situation is different in the case of natural persons who do not have their place of residence in Poland (these are the so-called tax non-residents). Such persons are subject to tax liability only on income earned in the territory of the Republic of Poland. This principle results directly from Art. 3 section 1, 1a and 2a of the Act on Personal Income Tax (hereinafter: the PIT Act). At the same time, in accordance with Art. 4a of the PIT Act, these provisions apply taking into account double taxation agreements to which Poland is a party.

The OECD Model Convention – a model act for concluding this type of bilateral agreements – provides that directors' remuneration and similar payments received by a person residing in one country due to membership in the management or supervisory body of a company with its registered office in the other country may be taxed also in the other country (source country).

What does this mean in practice? It may happen that a person (Polish tax resident) who is employed in a foreign entity (or is a management board member in a foreign company) will be obliged to settle their taxes both in Poland and abroad. In order to reduce the tax burden, we should always check whether in a given case we can apply any of the methods of avoiding double taxation resulting from a relevant international agreement.

Member of the Management Board in a foreign company – remuneration contributions and social security

The second key issue in the case of management board members of foreign companies is determining in which country they are subject to compulsory social insurance.

Detailed regulations in this respect are included in the provisions of EU law – including Regulation (EC) No. 883/2004 of the European Parliament and of the Council on the coordination of social security systems. The rule is that a person is subject to compulsory social insurance only in one country. Which country it will be is influenced by a number of factual circumstances.
Therefore, both to determine the place of taxation of income from being as a member of the Management Board in a foreign company, and to determine in which country a given person will be subject to compulsory social insurance, it is necessary to conduct a thorough analysis of the actual situation. Each of the circumstances may have a significant impact on tax and social security consequences.

To avoid possible errors in this area, please contact us. Our experts will be happy to answer your questions.