From 2018 income of management board members to be taxed at 18% and 32%

Under a proposed amendment to the Personal Income Tax Act, from 1 January 2018 the compensation of management board members will be taxed at regular rates (18%/32%), whether paid in cash or bonuses in the form of derivatives of financial instruments or other property rights.

Taxation of managers’ compensation

Poland’s Personal Income Tax Act provides that any compensation for performance of work under an employment contract, contract for management of an enterprise, or managerial contract is taxable according to the ordinary tax scale. This means that income from work in the tax year up PLN 85,528 is taxed at 18% and any amount above that at 32% (subject to the applicable income exclusion).

In practice the annual pay of employees or persons working under civil contracts often exceeds PLN 85,528, and a substantial portion of their income is taxed at 32%. This applies in particular to members of management boards and persons managing an enterprise under a civil contract.

With the aim of avoiding application of the 32% PIT rate, models have appeared on the market for structuring managers’ compensation in the form of various types of bonuses. Management board members covered by such a model typically receive part of their compensation in the form of a cash salary and another portion in the form of derivatives of financial instruments or other property rights, which are then typically sold (often back to the employer).

This model has generated positive tax consequences for managers, as their income from sale of such rights is treated as capital gains, taxed at 19% regardless of the amount.

Problems with interpretation of regulations

Along with the spread of this compensation model, numerous doubts have arisen about its use. The main problematic issue is whether income from property rights received in connection with the performance of work should be classified as capital gains or ordinary earned income. Both the tax authorities and the administrative courts have often taken varying positions on this issue.

There are also doubts concerning when the income connected with the receipt of such property rights arises. Some tax authorities and administrative courts take the view that income from property rights received as compensation for work arises when such rights are received. Under other views, such income does not arise until the property rights are exercised (i.e. when they are sold).

General anti-avoidance rule

The use of this form of compensation for persons performing work is not considered desirable from the legislative point of view. It aims at circumventing the general rule that income from work is taxed under the ordinary rates, thus reducing the income tax receipts of the State Treasury.

This was pointed out by the head of the National Revenue Administration in guidance issued on 1 August 2017 on combating tax avoidance in the context of incentive programmes. In his view, the circumstances surrounding the use of compensation in the form of financial instruments and other property rights indicate artificiality through creation of a construction of financial instruments aimed at achieving a tax advantage. Thus the use of such forms of compensation may meet the conditions for application of Poland’s general anti-avoidance rule (GAAR).

Proposed changes

Apart from reliance on the GAAR, to eliminate measures aimed at minimising taxation through bonuses in the form of financial instruments legislators also plan to tighten the PIT Act.

Under the bill forwarded to the Senate on 30 October 2017, income from exercise of rights to securities or derivative financial instruments obtained through taking up or acquiring such rights as an in-kind or gratuitous benefit will be attributed to the source of income for which the in-kind or gratuitous benefit was obtained. This means that income from property rights received as compensation for work will constitute income from the performance of work. (For example, income from property rights received as compensation for work performed under an employment contract would be attributed to the employment relationship, or under a managerial contract would be deemed to be income for personal services.) By this method, compensation for the performance of work received in the form of property rights would be taxed under the regular scale, not as capital gains.

The amending act also contains a definition of “incentive programme” and clarifies the issue of when income from shares received in an incentive programme is recognised. Under the bill, taxable income would not arise until such shares are sold. This rule would apply only to income obtained by persons eligible to take up or acquire shares of a joint-stock company whose registered office or management is located in a country with which Poland has concluded a treaty on avoidance of double taxation.


The idea of including provisions in the PIT Act clarifying that compensation paid as bonuses in the form of financial instruments or other property rights is to be taxed like other earned income will undoubtedly help eliminate the situation in which taxpayers artificially reduce their tax obligations. This measure, combined with the general anti-avoidance rule in force in Poland, should equalise the rules for taxation of pay received for work, regardless of the form of payment. It remains an open question, however, whether attempts by workers to reduce their tax rate to 19% is a signal to lawmakers that the current marginal PIT rate of 32% is too high.

Mateusz Jopek, adwokat, Tax practice, Wardyński & Partners