Last week, a client came to our law firm – a Polish businesswoman operating in Poland, who carries out some of her contracts in Germany. She employs staff and contractors who work abroad, often for several months a year. Her main question was: how to reduce advance payments for income tax and social security contributions when posting staff abroad, whilst ensuring that employees who expect attractive salaries are not lost. In such situations, it is also crucial to organise the entire posting process correctly, as we discussed in more detail in the article Posting workers to Germany: a step-by-step guide for Polish employers.
Before she came to the firm, the client had developed her own idea for optimisation. Put simply, her plan was to employ contractors at the minimum wage in Poland and at the minimum rates required in Germany, whilst paying the remainder of their remuneration outside the official payroll system. Funds from the limited liability company were to be channelled through a fictitious contract with a sole trader, who would issue invoices for bogus services, and the remuneration would then be returned to the employees in cash.
As can be seen, we would be dealing with two streams of money: a formal, low-taxed minimum, and an informal surplus which does not appear on payslips, in tax returns or in social security contribution documents. The firm’s task was to evaluate this model, identify the risks and propose realistic, legally compliant alternatives.
Why paying the minimum wage and the rest „under the table” does not constitute tax optimisation
The first step was to make it clear that the client’s plan was not a standard tax optimisation scheme, but an attempt to circumvent tax and insurance regulations.
Firstly, if an employee or a contractor actually receives a higher remuneration than that stated in the contract, and the difference is paid in cash, this constitutes hidden remuneration. In the event of an audit, the tax authorities and the Social Insurance Institution (ZUS) – on the Polish side – as well as the relevant institutions on the German side – examine the actual flow of payments, rather than merely what is set out in the contract. All cash payments are treated as part of the remuneration on which tax and social security contributions are due.
Secondly, sham contracts with sole traders are a classic example of actions intended to circumvent the law. If a sole trader formally provides services but does not in fact carry out any work for the company, and merely channels money through their business so that it returns to employees as cash, this constitutes a sham arrangement. Such invoices will not stand up to scrutiny during an audit – the tax authorities may disregard the sham transactions and treat the entire payment as employees’ wages or fees for services rendered.
Thirdly, payments made outside the system entail a number of risks and penalties. In particular, there is a risk of additional income tax being levied on the full actual amount of the remuneration, together with interest on arrears and tax penalties. Furthermore, there is a risk that additional social security contributions for a period of several years going back in time, should it transpire that the actual remuneration was higher than that declared. It is also important to bear in mind the risk of personal liability for members of the board of a limited liability company and sole traders, including criminal fiscal liability, if it is established that there was an intention to deliberately conceal the basis for taxation and social security contributions.
This means that short-term savings on advance payments and contributions can lead to costs that are many times higher – when you factor in additional charges, interest, penalties and the costs of resolving disputes. It was precisely this risk that we wanted to make clear to the client.
The three pillars of lawful optimisation of tax advances and social security contributions
Instead of a model based on informal cash payments, we proposed to the client a transparent, three-pillar remuneration model for contractors posted to work abroad. It is based on solutions expressly provided for in Polish tax and social security legislation.
1. Actual remuneration under a contract for services
The first pillar is a contract for services offering a realistic basic remuneration. This remuneration constitutes income from work carried out personally by the contractor and forms the basis for the collection of advances on income tax by the company and is included in the basis for calculating social security contributions.
We have proposed a remuneration package that truly reflects the value of the work carried out, taking market rates into account. There is a twofold benefit here: firstly, we minimise the risk of the authorities challenging undervalued rates as being artificial; and secondly, we build the company’s credibility as an employer and client, both in the eyes of our employees and our German business partners.
2. Per diems and subsistence allowances exempt from income tax
The second pillar is subsistence allowances and other travel-related expenses paid to contractors in connection with the performance of work abroad. If a contractor is sent on a business trip, they receive a foreign travel allowance and reimbursement of travel and accommodation costs, and all such payments are documented (travel authorisation, expense reports, invoices), then – up to the limits set out in the regulation – these payments are subject to income tax exemptions. For trips to Germany, we set out specific daily subsistence allowance amounts and accommodation limits that can be safely applied.
Instead of paying part of the remuneration in cash, we proposed that the portion of the remuneration which effectively compensates for the costs of living and working abroad should be covered by the allowance and travel expense reimbursement scheme. In this way, the employer reduces their tax burden, the contractor has clarity on what they are being paid for and which benefits are tax-exempt, and the whole arrangement remains documented and defensible in the event of a tax audit. It is worth bearing in mind, however, that any amount exceeding the daily allowance or flat-rate accommodation allowance constitutes taxable income for the contractor and may be included in the basis for calculating social security contributions, which shows that this model operates up to the limit set by the regulations, and not without restrictions. It is also necessary to verify whether a person working abroad has adequate social security cover – we have described the consequences of a lack of such cover in the article Working abroad without an A1 certificate.
3. Exclusion of secondment allowances from the basis for calculating social security contributions
The third pillar consists of exemptions from the contribution assessment base for business travel allowances. The provisions of the Contributions Regulation stipulate that per diems and other payments in respect of business travel (including travel abroad), reimbursement of travel, accommodation and other travel-related expenses, up to the amount specified in the relevant provisions, are not included in the basis for calculating social security contributions. These exemptions stem from the Regulation of the Minister of Labour and Social Policy of 18 December 1998 on the detailed rules for determining the basis for calculating social insurance contributions, which constitutes an implementing act for the Act on the Social Insurance System.
This means that the basic remuneration under a contract for services remains subject to social security contributions; business travel allowances within the prescribed limits do not give rise to contributions; and it is only amounts exceeding the limit that trigger the obligation to calculate contributions on those sums.
For a business owner, this represents a tangible, quantifiable benefit. They can reduce their social security contributions in a way recognised by ZUS, rather than concealing wages through fictitious services provided by a sole trader.
Why it is worth choosing a legal remuneration model for posted workers
The decision on which remuneration model to choose is not just a matter of regulations, but above all a matter of business strategy. Firstly, by opting for a transparent three-pillar model – comprising a basic salary, allowances and reimbursement of expenses – the business owner reduces tax and social security contributions where permitted by law, whilst at the same time eliminating the risk of additional assessments and penalties associated with unofficial payments.
Secondly, a transparent remuneration model makes it easier to recruit and retain staff – people can see that part of their pay takes the form of allowances, but they do not have to worry about whether their cash payment will arrive or whether it is secure. Furthermore, it improves relations with German business partners, who increasingly expect their Polish counterparts to comply with local employment and remuneration standards.
Thirdly, transparent arrangements are an investment in the security of the board and the owners. Rather than wondering whether it will be possible to defend the appearance of legitimate contracts and cash flows in the event of an audit, the company can confidently demonstrate that its remuneration model complies with the law and the practice of the relevant authorities.
Optimisation or circumventing the law – where is the line drawn?
To summarise our recommendations, it must be said: optimisation – yes; circumventing the law – definitely not.
In short, tax optimisation this involves making use of the provisions set out in the legislation – namely, allowances, expense reimbursements and exemptions from social security contributions – whilst ensuring full documentation, whereas circumventing the law involves sham contracts, unofficial payments, dual remuneration streams and the deliberate concealment of the tax and social security contribution base.
In our experience, business owners who opt for transparent, well-planned remuneration models based on three pillars benefit more than those who make short-term savings on tax and social security contributions at the expense of legal certainty.
Do you need support? Plan your legal optimisation with our law firm
If you are considering changing the remuneration model for your employees or contractors, are planning to post staff to work in Germany or other EU countries, or wish to reduce your advance income tax and social security contributions in a safe manner, Please feel free to contact our law firm.
We offer:
– an analysis of current contracts and the remuneration model,
– the development of a legally compliant, three-pillar model for contractors posted abroad,
– advice on or an analysis of the articles of association, to ensure that the corporate structure supports, rather than hinders, safe optimisation. Our article may also be helpful in this regard Articles of Association for a limited liability company – what should they include?.
Let’s work together to ensure that your business grows steadily, predictably and in accordance with the law – on both the Polish and German sides of the border.
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