Transactions with management board members – when does the tax authority challenge deductible costs?

Transactions carried out between companies and members of the management board are, in themselves, neither unusual nor uncommon in business practice. Nevertheless, in order to avoid such transactions being challenged by the tax authorities, both the commercial rationale for such arrangements and their terms should be carefully analysed from a tax perspective.

Indeed, such transactions are increasingly becoming subject to detailed scrutiny across several areas simultaneously, including:

• corporate income tax (CIT) deductible expenses,
• the right to deduct VAT,
• arm’s length pricing in the context of transfer pricing regulations.

Does this mean that such transactions should not be entered into?

No. They may be carried out, provided that they address genuine and commercially justifiable business needs of the company – for example, when they concern specialised services.

In this context, it is also crucial to ensure that the activities performed by management board members under remunerated service arrangements do not overlap with the statutory duties performed by them in their capacity as board members per se.

Put simply: a company cannot finance activities which a management board member would, in any event, be required to perform as part of his corporate function.

Therefore, when a particular activity involves:

• management,
• supervision,
• strategic decision-making,

it is very difficult to defend the position that such activity constitutes a separate remunerated service.

This is particularly relevant in the case of advisory services, where the distinction between the provision of services and the performance of management functions is often blurred.

Case law indicates that even where formal service agreements have been concluded, the scope of such agreements cannot overlap with management duties. As emphasised, inter alia, in judgments I SA/Bk 42/25 and I FSK 1771/22, where services rendered are regarded as forming part of the statutory function of a management board member, remuneration for such activities may be challenged as undue.

Is it sufficient merely to separate the duties of the service provider and the management board member?

This is certainly an important element, but not the only one.

In practice, we observe that tax authorities also examine the actual role of the management board members in connection with both the provision of services to the company and the performance of their management functions.

In this respect, it is essential that services rendered by a management board member are also properly received and verified by the company. In practice, when the same individual (being a management board member):

• provides services to the company,
• while simultaneously receiving and approving those services on behalf of the company as its representative,

such a transaction may be challenged by the tax authorities in terms of:

• arm’s length conditions,
• the actual substance of the services,
• the genuine separation of roles.

Proper allocation of responsibilities within the overall model helps ensure that services rendered by management board members are verified in terms of both quality and usefulness for the company’s business operations.

Is a well-drafted service agreement sufficient in the case of services provided by management board members?

Unfortunately not.

The agreement itself, even if drafted in considerable detail, does not in itself safeguard transactions concluded with management board members.

In practice, the key issue is whether a given transaction:

• actually took place,
• was commercially justified,
• was appropriately documented.

As demonstrated by the case law of the administrative courts, the relevant benchmark is not whether the parties concluded an agreement and prepared documentation, but whether the transaction genuinely took place and had a valid commercial rationale. In the absence of documents reflecting the actual course of events, the agreement or supporting documentation alone will not suffice.

Courts are increasingly focusing on such elements as the credibility of the taxpayer’s explanations, the consistency of the transaction’s implementation, and the existence of genuine business reasons for entering into the arrangement. The absence of these elements may result in the tax treatment being challenged – irrespective of whether the transaction concerns intangible services or more “traditional” goods transactions. This approach was clearly emphasised, inter alia, in judgment I SA/Ol 194/25, where the court (analysing a transaction between a company and its president of the management board) underlined the importance of the genuine nature of business events and their economic justification.

How should services rendered by management board members be documented?

This is where the so-called benefit test becomes particularly useful.

Although preparation of a benefit test is not formally mandatory, in practice it proves highly valuable, especially during tax audits concerning historical periods. It is not merely a concept known from transfer pricing documentation – it is a practical tool used by tax authorities to verify whether the company was entitled to incur a given expense at all.

The primary purpose of the benefit test is to demonstrate that the services provided by management board members were necessary for the company’s business activities and were actually performed.

Importantly, it is not sufficient merely to state that the services “supported the business” or “contributed to growth”. Tax authorities expect concrete evidence, including:

• whether the service genuinely affected the company’s operations,
• whether the service was required at the relevant time,
• and, crucially, whether it was actually performed.

In the case of intangible services, this final element is most frequently challenged. If there is no evidence of activities performed, working materials, or deliverables resulting from the services, any narrative regarding potential benefits becomes largely irrelevant.

More information on benefit test documentation can be found in our publication: https://www.mddp.pl/benefit-test-a-global-priority-for-tax-authorities-in-transfer-pricing/

How can transactions with management board members be safeguarded?

Protecting such transactions requires more than merely formal documentation – the key is to demonstrate that the cooperation has genuine substance and a valid business rationale.

Ultimately, everything comes down to one question: if the management board member were removed from the relationship, would the company still decide to purchase such services on the market? If the answer is not obvious, this may indicate that defending the transaction could prove difficult.

In practice, it is advisable to ensure:

1. Consistent documentation procedures – a clearly defined scope of services, their purpose, and their connection with the company’s business activity. Vague agreements are among the most common issues identified during tax audits.
2. Ongoing reporting – materials demonstrating actual activities performed (reports, work summaries, communications) constitute the primary evidence of services rendered, particularly in the case of intangible services. The benefit test becomes a key element in assessing the validity of expenses incurred by the taxpayer. It is essential to collect and retain documents on an ongoing basis confirming that the transaction was genuinely performed and generated real benefits for the company.
3. Arm’s length analysis – not only of the pricing, but also of the commercial rationale for the cooperation as a whole. In practice, the question is whether a similar arrangement would be justifiable between unrelated parties.

Summary – where does the greatest risk lie?

The greatest tax risk in transactions involving management board members is concentrated in three areas:

• the genuine nature of the services provided,
• the clear separation between the services rendered and the statutory duties of the management board member,
• the economic justification of the transaction.

Only where all of these conditions are met collectively is there a realistic prospect of successfully defending the tax treatment during a tax audit.

FAQ

Are transactions with management board members permitted from a tax perspective?

Yes. Transactions with management board members are permissible and commonly occur in business practice. However, they are not tax-neutral – they are subject to scrutiny by the tax authorities, particularly in the areas of CIT, VAT, and transfer pricing.

When may the tax authorities challenge costs related to services provided by management board members?

Most commonly when:

• the services are intangible and difficult to verify,
• there is insufficient evidence of their actual performance,
• the scope of the services overlaps with the statutory duties of the management board member,
• the remuneration lacks economic justification.

The key consideration is the genuine nature of the transaction and its commercial purpose.

May a management board member provide additional services to the company?

Yes, provided that:

• the services are clearly separate from the board member’s statutory duties,
• they have a genuine and measurable character,
• there is a valid business rationale for them,
• they are properly documented.

Otherwise, the tax authorities may conclude that they do not constitute separate services.

Is a service agreement with a management board member sufficient for tax purposes?

No. The agreement itself does not constitute sufficient tax protection.

The tax authorities primarily examine:

• whether the services were actually performed,
• whether they were economically justified,
• the genuine nature of the cooperation.

The decisive factor is the substance of the transaction, rather than merely its formal documentation.

What is a benefit test and when is it applied?

A benefit test is a tool used to demonstrate that:

• the service was actually performed,
• it was required by the company,
• it generated or could reasonably have generated a genuine commercial benefit.

In practice, it is particularly important for intangible services within related-party transactions, including those involving management board members.

How should services provided by a management board member be documented?

Recommended elements include:

• reports and summaries of work performed,
• business correspondence (e.g. emails),
• working papers and analyses,
• documentation confirming the outcome of the services.

Documentation should be prepared on an ongoing basis and not solely for the purposes of a tax audit.

What constitutes the greatest risk in transactions involving management board members?

The greatest risk concerns situations where:

• there is no genuine separation between management functions and services provided by the board member,
• intangible services are not properly documented,
• it is not possible to demonstrate a genuine benefit for the company.