Taxation of managerial contracts within sole proprietorships

2018.04.09

On 17 June 2015 the Supreme Court ruled that in the situation where a management board member signs a managerial contract within his or her sole proprietorship, the basis for social security charges is such contract, and not the sole proprietorship. Thus, social insurance premiums should be paid on the entire remuneration received on the basis of such agreement (which is still capped this year, a fact that is likely to change next year), rather than on a declared amount which cannot be less than 60% of the forecasted average monthly remuneration, which is the case with sole proprietorships. In a subsequent ruling of 29 March 2017, the Supreme Court has verified its position, ruling that the managerial contract (and not the sole proprietorship) is the basis of social security only for managers who are management board members. Managers who are not management board members should pay premiums on account of the sole proprietorship. According to the Supreme Court, this is a consequence of the fact that a manager who is a management board member acts on behalf of and in the name of the company under management, as a guardian of its management organ, which deprives him or her of the qualities of an entrepreneur. In the case of managers who are not management board members, the situation is different, because they perform management duties on their own and in their own name. Given that, in practice, management board appointments are frequently a secondary issue, sometimes of accidental nature (it does happen that management board members are foreigners from the parent companies, while the actual management is in the hands of managers who are not board members), it is difficult to agree with the Supreme Court’s view. Having said that, it is a positive development, especially in the context of the approaching elimination of the cap on social security premiums. A managerial contract within sole proprietorship and without management board membership makes it secure to pay premiums on the declared income only - at least as long as the courts maintain this position. It should be remembered that the tax must be paid on the progressive scale.