Many business owners consider delegating certain responsibilities within the company to individuals outside of the management board, often contemplating granting such authority to family members. One solution is to establish a procurator, which, in the broadest sense, is a specific form of general power of attorney disclosed in the National Court Register (Krajowy Rejestr Sądowy). This allows for the authorization of specific individuals to act on behalf of the company while not exposing them to financial liability for the company’s obligations, except for any potential liability for damages to the company itself. A procurator is empowered to carry out all judicial and extrajudicial actions related to running the business, such as representing the company externally, negotiating contracts, and signing agreements. A procurator may act independently, representing the company externally by themselves, or jointly, when the procurator represents the company but only in conjunction with another board member. The procurator’s independence may thus be partially restricted. Importantly, a procurator may receive compensation for their role.
Taxation of a Procurator:
The taxation of a procurator’s income is relatively attractive. Compensation received for serving as a procurator qualifies as income from other sources. Limited Liability Companies (LLCs) do not withhold advance payments on personal income tax (PIT) from a procurator’s salary throughout the year. The procurator is responsible for declaring and personally paying tax on their income in the annual tax return for the previous year by April 30 of the following year. During this period, they effectively enjoy the use of their income without deductions. The company merely provides the procurator with an PIT-11 statement containing the calculated amount of their compensation. The income from a procurator’s role is combined with income from other sources in the annual PIT-37 tax return, and this income is taxed at a progressive tax rate. This means it benefits from the annual tax-free amount of 30,000 PLN, with a tax rate of 12%. However, if the taxable income exceeds 120,000 PLN per year, the tax rate increases to 32%. This mechanism makes receiving compensation as a procurator less favorable for individuals with other income similar to or exceeding 120,000 PLN per year, as the 32% tax rate may not be advantageous. Nonetheless, the procurator’s compensation is considered a cost of earning income for the company, reducing double taxation of the LLC’s income from the procurator’s perspective.
Social Security Contributions (ZUS) for a Procurator:
A procurator is only subject to the obligation to pay health insurance contributions; the company registers the procurator for health insurance. The basis for calculating the health insurance contribution is 9% of the procurator’s gross remuneration. In this case, there are no social security contributions to ZUS.
Is a Procurator’s Compensation Considered Hidden Profits under Estonian CIT?
As a general rule, it seems that in most cases, paying compensation to a procurator does not result in the creation of so-called hidden profits in a company that has opted for Estonian corporate income tax (CIT) – even if the procurator is simultaneously a shareholder of the company. This has been confirmed, among others, in an individual interpretation by the Director of the National Tax Information on January 3, 2023, No. 0111-KDIB2-1.4010.655.2022.1.DD. However, it should be noted that to avoid the creation of hidden profits for taxation under Estonian CIT:
- The compensation for the procurator should be determined on market terms in accordance with Article 11c of the CIT Act and should have no connection to the right to profit in the company.
- The compensation paid to the procurator for the actions they take on behalf of the company should not serve to increase the capital of that shareholder but should be payment for actions genuinely related to the company’s activities, and should not serve to distribute profits.
Given the various factual scenarios that may occur in connection with a procurator’s compensation, it is advisable to conduct a case study analysis and eliminate any potential tax risks before granting compensation to a procurator in a company subject to Estonian CIT regulations.