The management board of an sp. z o.o. (limited liability company) plays a key role in running the business, representing it externally and taking strategic business decisions. In the course of its activity, the company often incurs a variety of expenses related to the board, from remuneration and business travel to renting flats for board members. The key question for business owners and accountants is whether these expenses can be treated as tax-deductible costs in CIT (corporate income tax). Similar cost questions arise in settlements with employees, for example with an unsettled business trip advance.
The management board is the executive body of a limited liability company whose basic task is to manage the company's affairs and represent it externally. It can consist of one or more members, depending on the company's needs and type of business. All expenses the company incurs for board members require detailed analysis as to whether they can be treated as tax-deductible costs
This issue is particularly important in the context of tax planning and compliance with tax law. Classifying expenses incorrectly can lead to serious financial consequences during a tax audit, which is why it is so important to understand the rules for treating expenses as tax-deductible costs.
Basic rules on tax-deductible costs
To understand expenses for board members, you need a proper grasp of the definition of tax-deductible costs in corporate income tax. Under Article 15 section 1 of the CIT Act, tax-deductible costs are costs incurred to earn income from a source of income or to maintain or secure a source of income.
The definition of tax-deductible costs is general and positive, which means that any expense meeting certain criteria can be treated as a tax-deductible cost. At the same time, the Act provides a catalogue of expenses excluded from tax-deductible costs, set out in Article 16 section 1 of the CIT Act. No expense listed in this catalogue can be treated as a tax-deductible cost, even if it was incurred to earn income
It is crucial that the definition of tax-deductible costs does not work automatically. This means that even if an expense is not on the list of excluded costs, it does not automatically follow that it can be treated as a tax-deductible cost. Each expense requires individual analysis against the basic criteria.
To be treated as a tax-deductible cost, an expense must meet the following basic conditions:
- It must actually be incurred by the taxpayer
- It must be incurred to earn income or to maintain or secure a source of income
- It must not be on the closed list of expenses not recognised as tax-deductible costs
- It must be properly documented in line with the applicable rules
- There must be a cause-and-effect link between incurring the expense and the possibility of earning income
Checking the cause-and-effect link between incurring costs and generating income is one of the most important elements in assessing whether an expense can be treated as a tax-deductible cost. The expense does not have to translate directly into specific income – a real chance of generating taxable income or of maintaining or securing its source is enough
Pay particular attention to proper documentation of expenses. The company must have appropriate documents confirming that the expense was incurred, its amount and its link to the business. Lack of proper documentation can lead the tax authority to challenge the cost, even if the expense was justified on the merits.
Expenses for board members in practice
The tax rules do not introduce a general ban on treating expenses a company incurs for its board members as tax-deductible costs. This means such expenses can be tax-deductible costs, provided they meet the general criteria set out in the CIT Act.
Expenses a company incurs in connection with the work of its board can be treated as tax-deductible costs when they were incurred to earn income or to secure or maintain a source of income. It is crucial to show the link between the expense and the company's business and its ability to generate income.
The most common expenses for board members that can be tax-deductible costs include:
- Remuneration paid to board members for performing their function
- Costs of business trips related to the company's operations
- Expenses for buying or providing equipment needed for work
- Costs of using a company car or mobile phone
- Expenses for renting a flat where the business is run
- Costs of training and developing skills related to serving on the board
Benefits in kind are tax-deductible costs for the company only if there is an appropriate legal basis for providing them to board members. The company's obligation to provide specific benefits must follow from an employment contract, a civil-law contract, a shareholders' resolution or other internal company regulations. Without a proper legal basis, the tax authority may challenge the cost
The practical application of these rules can be illustrated with a specific example:
A limited liability company employs Mr Jacek under an employment contract, and he also serves as a board member appointed by a shareholders' resolution. For serving as a board member, Mr Jacek receives monthly pay, a company phone, a laptop and a company car. All these benefits are set out in detail in the shareholders' resolution, which is the legal basis for providing them. In this case, the company can treat all these expenses as tax-deductible costs, because they relate to the management function and have an appropriate legal basis.
Unilateral benefits
A particularly important issue for expenses on board members is unilateral benefits, governed by Article 16 section 1 point 38 of the CIT Act. Under this provision, expenses related to providing unilateral benefits to shareholders or members of cooperatives who are not employees are not tax-deductible costs.
The provision on unilateral benefits applies where a capital company provides a benefit to its shareholder without receiving anything in return. The rule is meant to prevent shareholders from using the company to finance their private expenses at the expense of other shareholders and the state budget
Crucially, however, the exclusion for unilateral benefits does not apply where the benefits for a shareholder are related to the function they perform on the board. In such a situation, these benefits correspond to the individual performing specific activities for the company, which rules out treating them as unilateral.
This issue requires particular caution where board members are also shareholders of the company. In such situations, it must be shown that the expenses really relate to serving as a board member and are not a hidden way of transferring funds to shareholders. In a company taxed under the lump-sum tax on company income (Estonian CIT), the rules on tax-deductible costs do not determine the tax, and benefits for a shareholder – including one who serves on the board – may be hidden profits (Article 28m section 1 point 2 and section 3 of the CIT Act); remuneration under an employment contract and from appointment is not treated as hidden profits only up to the limit in Article 28m section 4 point 1. Payments to shareholders are treated separately, and their rules are described in our article on the taxation of profit distribution after a company transformation.
To avoid having reported tax-deductible costs challenged during a possible audit, it is recommended to:
- Set out board members' duties in detail in corporate documents
- Specify precisely the benefits due for performing the function
- Document the actual performance of management duties
- Keep the benefits proportionate to the scope of duties
- Regularly review whether the expenses incurred are justified
Where there is doubt about the link between the expenses and serving as a board member, the tax authority may treat them as unilateral benefits for a shareholder that are not tax-deductible costs. That is why it is so important to document properly the legal basis and the business rationale for incurring specific expenses
Expenses for renting flats for board members
A particularly interesting example of expenses for board members is the cost of renting flats, which can be tax-deductible costs in certain circumstances. Such expenses are justified mainly where board members live somewhere other than the company's registered office and their presence where the business is run is necessary for effective management of the company.
Expenses for renting flats for board members can be treated as tax-deductible costs when they are meant to enable board members to carry out management activities at the company's registered office and to run the business effectively. It is crucial to show that incurring these expenses is necessary or significantly helps to achieve the company's business goals.
For expenses on renting flats for board members to be tax-deductible costs, board members must be linked to the company by an employment relationship or another equivalent legal relationship. Where board members are not employees of the company, the need for the company to incur expenses for them must follow from properly concluded civil-law contracts, lawfully adopted shareholders' resolutions or provisions of the articles of association
The practical application of these rules was confirmed in an individual tax ruling (KIS) issued by the Director of National Tax Information, ref. 0111-KDIB1-1.4010.486.2021.1.EJ of 8 November 2021. The ruling concerned a company carrying out research and development whose president and board member were citizens of South Korea.
In the case analysed, the board members had homes and families in South Korea, but because the company's business had to be run in Poland, the company rented flats for them. The considerable distance of several thousand kilometres between their place of residence and the company's registered office justified incurring such expenses. The Director of National Tax Information confirmed that expenses for renting flats, the administrative charge and utilities are tax-deductible costs, because they are necessary for performing management functions effectively.
Key conditions that must be met when treating the cost of renting flats as tax-deductible costs:
- Link with the company's business – the expenses must be justified by business needs
- Legal basis – the obligation to incur the expenses must follow from appropriate documents
- Documentation – all expenses must be properly documented
- Proportionality – the amount of the expenses should be adequate to the needs
- Cause-and-effect link – there must be a link between the expense and the possibility of earning income
The company bears the burden of showing the cause-and-effect link between expenses on renting flats and earning income. It must also document that the cost was justified from the point of view of the business. The tax authority may challenge the costs if the company cannot show their business rationale
Direct and indirect costs in the context of board expenses
Classifying tax-deductible costs as direct and indirect is important for understanding the nature of expenses on board members. The distinction affects how the justification for treating specific expenses as tax-deductible costs is assessed and how they are recorded in the accounting books. For companies using our bookkeeping services, we also record expenses for board members in the accounting books.
Costs directly related to income are expenses that translate directly into specific, identified income. They can be assigned directly to specific income, and the cause-and-effect link is obvious and easy to show. Examples include the cost of buying goods for resale or the cost of materials used directly in production.
Indirect costs are expenses that cannot be assigned directly to specific income, but are reasonably justified as leading to income. Such costs relate to the general running of the business and to creating conditions that allow income to be generated. Expenses for board members are usually indirect costs
Expenses for board members usually relate to the general running of the company and are treated as tax-deductible costs as indirect costs. This means they do not have to translate directly into specific income, but they should be justified from the point of view of the business.
Features of indirect costs in the context of board expenses:
| Type of cost | Features | Settlement | Documentation |
|---|---|---|---|
| Board remuneration | Regular payments for performing the function | Monthly settlement | Resolutions, contracts, payrolls |
| Business trip costs | Expenses related to business travel | Settled after the trip | Tickets, invoices, expense reports |
| Renting flats | Providing conditions for work | Monthly payments | Lease agreements, invoices |
| Training and development | Improving management skills | Settled after the training | Invoices, certificates, programmes |
Crucially, indirect costs require particularly careful justification of their link to the company's business. The tax authority may challenge such costs if the company cannot show their reasonable business rationale.
Practical aspects of documenting expenses
Documenting expenses for board members properly is a key element in being able to treat them as tax-deductible costs. The company must have comprehensive documentation confirming both that the expense was incurred and its link to the business.
The basic elements of documentation of expenses for board members include:
- Legal basis – documents setting out the obligation or right to the benefit
- Accounting documents – invoices, bills, accounting evidence
- Substantive documentation – the business rationale for the expense
- Supporting documents – minutes, reports, confirmations of performance
- Settlements and records – correct recognition in the accounting books
Documentation of the legal basis for expenses on board members can include different types of documents depending on the nature of the relationship between the board member and the company. These can be employment contracts, civil-law contracts, shareholders' resolutions, provisions of the articles of association, internal regulations or statutes of the company. It is crucial that these documents are drawn up in line with the applicable rules and clearly set out the scope of benefits
Pay particular attention to documenting expenses that may raise doubts about their business nature. This applies especially where board members are also shareholders of the company, and the expenses may be interpreted as unilateral benefits for shareholders.
Recommended documentation practices include:
- Describing in detail the nature and purpose of each expense
- Collecting documents confirming that specific activities were performed
- Keeping records of the use of benefits in kind
- Documenting the business decisions that justify the expenses
- Regularly reviewing whether the costs incurred are justified and still relevant
For example, when renting a flat for a board member, the documentation should include not only the lease agreement and rent invoices, but also the business rationale for providing accommodation, documents confirming that management duties are performed at the company's registered office, and records of the actual use of the flat for business purposes.
