High social insurance premiums in Poland motivate remitters and insureds to seek business models allowing them to reduce their contributions. But the Social Insurance Institution—with the support of lawmakers—is closing more loopholes.
- Mandate contracts
The popularity of mandate contracts (umowy zlecenia) in Poland has stemmed at least in part from the fact that social insurance has been charged only on the first such contract. The first contract now serves as the basis for payment of full social insurance contributions—pension, accident and health insurance portions—as well as income tax, regardless of the amount payable to the individual hired under this type of contract. But each successive mandate contract is not mandatorily charged with full social insurance contributions, but is only subject to health insurance contributions and income tax. Following this rule, in many sectors of the economy it has become common for a person to be hired on the basis of two mandate contracts, with only the first one subject to full social insurance charges.
However, under an amendment to the Social Insurance System Act of 13 October 1998 entering into force on 1 January 2016, the rule that social insurance contributions are charged on the first mandate contract will be maintained, but at the same time it will be mandatory to pay social insurance contributions on mandate contracts up to the point where the basis is equal to the minimum wage. In effect, if the basis for payment of social insurance on the first mandate contract is lower than the minimum wage (PLN 1,850 per month in 2016), then additional mandate contracts will also be subject to social insurance charges until a basis equal to the minimum wage is reached.
In addition, if a person is hired under mandate contracts by multiple remitters, each of them will be required to withhold social insurance contributions unless the individual presents documents to the remitter (e.g. the ZUS RMUA form certifying that contributions are being deducted under another mandate contract) showing that the remitter is not required to pay social insurance under its contract with that person. This means that from 2016 a declaration to this effect by the insured will no longer be sufficient.
Meanwhile, the remitter—which will still be required to properly settle social insurance charges on mandate contracts—will be able to verify the certificates and other documents presented by the contractor. At the request of the remitter, the Social Insurance Institution (ZUS) will examine the correctness of the premiums for pension or disability coverage for such a person working under two or more mandate contracts. If mistakes are found in the level of the monthly basis for social insurance premiums, the Social Insurance Institution will promptly notify the remitter and the insured, via the remitter of the premiums.
- Managerial contracts
Another path for optimising social insurance contributions for managers has been foreclosed in a different way.
The social insurance efficiency of managerial contracts is based on the provisions of the Social Insurance System Act concerning overlapping grounds for coverage: self-employment and mandate contracts. Among other things, the law adopted the assumption that a person working under a mandate contract who also conducts non-agricultural business activity is mandatorily covered on the basis that arose earliest (e.g. self-employment).
Taking advantage of this rule, many people registered as sole traders with management of enterprises as the purpose of their business, and then, on the basis of this form of self-employment, took up managerial positions, for example as management board members in companies. These people paid social insurance premiums on the income they received from the company (on the basis of self-employment), but the basis for calculating the premiums was relatively low, generally no more than 60% of the projected average salary published by the Central Statistical Office. The amount of the social insurance contributions were then significantly lower than if premiums were calculated the same way as for persons working under mandate contracts, i.e. on the basis of their actual income.
For many years the courts accepted this approach, but this was shattered by the Supreme Court of Poland in its judgment of 12 November 2014 (Case I UK 126/2014). The court upheld the position of the Social Insurance Institution and found that a managerial contract is the basis for payment of social insurance contributions, trumping self-employment when as part of his registered business the manager obtains income only under the managerial contract. The court held that under Art. 13(9) of the Personal Income Tax Act, income from a managerial contract is deemed to be income from personal services even if it is performed as a sole trader. In consequence, it is not the basis for social insurance coverage as a contract performed by the individual’s registered business.
This judgment disadvantageous for managers was ultimately upheld in a resolution of a seven-judge panel of the Supreme Court on 17 June 2015 (Case III UZP 2/15), ruling that a managerial contract is a separate basis for social insurance and health insurance coverage, as a contract similar to a mandate contract.
- Employment abroad
But the measures taken to close loopholes in Polish social insurance coverage have not discouraged taxpayers from seeking out new ways of optimising their social insurance contributions.
Individual businesspeople have taken a great interest in partial employment in another EU member state based on Regulation (EC) No. 883/2004 of the European Parliament and of the Council of 29 April 2004 on the coordination of social security systems, which lays down rules for assigning employees and businesspeople to social insurance and health insurance institutions, for example when they have overlapping grounds for coverage in different EU member states. Under Art. 13(3) of the regulation, “A person who normally pursues an activity as an employed person and an activity as a self-employed person in different Member States shall be subject to the legislation of the Member State in which he/she pursues an activity as an employed person”. Therefore a person who is employed even on a partial basis in one EU member state but operates as a business entity in another member state pays social insurance premiums only in the member state in which the person works as an employee. Consequently, part-time employment in a member state other than Poland means the person has a right to pay lower contributions in the other country and not pay contributions in Poland.
But this approach must be followed with caution, because haphazard application of the EU regulation may have consequences that are the opposite of what was intended.
First and foremost, these provisions prohibit any form of discrimination. Consequently, a person who is self-employed in Poland but an employee in another EU member state is regarded as also being self-employed in the other member state, and subject to the related social insurance regulations in that member state—imposing on him a number of registration and reporting obligations as well as the obligation to pay social insurance premiums there on the basis of his business activity. This obviously requires the person to incur additional costs for accounting services and the like. So this type of optimisation should be implemented only after conducting a detailed cost/benefit analysis.
There is an additional risk connected with fictitious employment, which is an unlawful act. Employment means that the employee undertakes to perform work of a specified type for the employer, under the employer’s direction, at the place and time designated by the employer, and the employer undertakes to hire the employee and pay the employee a salary. If any of these elements (such as payment of salary) are absent, it is grounds for finding that the employment contract is illusory, which may in turn require payment of social insurance contributions in arrears, plus default interest, and may also give rise to a risk of fiscal criminal liability.
- Overlapping grounds for coverage in Poland
Nonetheless, alternative grounds for social insurance coverage sometimes do function in Poland and can safely be used to optimise contributions.
For example, income from business activity is not a mandatory basis for social insurance coverage if the self-employed person also receives income inter alia on the basis of:
- Employment relationship (except for prosecutors)—if in the given month the basis for premiums pursuant to employment is equal to or greater than the minimum wage (PLN 1,850 per month in 2016)
- Cottage work—in the case of self-employed persons this is possible if the basis for premiums pursuant to cottage work is no lower than the lowest basis for premiums for conducting business activity
- Mandate contract or agency contract—if in the given month the basis for premiums under mandate contracts and agency contracts is no lower than the minimum basis for premiums for conducting business activity. In the case of insureds eligible for social insurance relief for new firms, this amount is lower, calculated on the basis of the relief.
Optimisation of social insurance contributions may also occur by combining three grounds for social insurance coverage. For example, a combination of:
- Employment contract
- Business activity, and
- Mandate contract.
In this example, income from business activity would be exempt from social insurance contributions regardless of the premium basis on the other grounds for coverage. In that case, social insurance contributions would be paid only pursuant to the employment contract and the mandate contract.
But under the foregoing examples, it is necessary to follow a structure that will not result in reclassification of any source of income as actually earned under a different basis. For example, under Art. 8(2a) of the Social Insurance System Act, if a person performs a mandate contract for an entity which is also his employer, for social insurance purposes the contractor is regarded as an employee.
Finally, an interesting alternative for persons pursuing non-agricultural business activity is the rule that if one person conducts different types of business activity (e.g. as a sole trader but also as a member of a partnership), he or she is subject to mandatory pension and disability coverage only pursuant to one type of activity of the person’s choosing.
The foregoing examples do not exhaust the possibilities for optimisation of social insurance contributions. The details of the specific case may create many other possibilities, including options resulting in lower tax obligations.
Joanna Prokurat, Tax Practice, Wardyński & Partners