Management of the сommunity (company) by an owner, not a director - legality and accordination to the legislation
When establishing a company, rather often the owners ask the following: can we manage a Company independently, without hiring a director, while the Company in fact does not perform any activity and does not get any income?
At first we should understand if such actions do not violate the norms of the labor and tax law (in part of payment of the personal income tax and the unified social tax) between the owner and the Company. Because at the first glance that looks much like labor relations.
However, it is specified by the law, and namely by part 2 of Article 65 of the Commercial Code of Ukraine, that the owner exercises his rights on management of an enterprise directly or the bodies authorized by him in accordance with the statute of the enterprise (or other constituent documents). The said gives a possibility not to hire the director of the Company and not to conclude labor relations with him. However, it is important to understand that the statute of the Company should also provide the owner’s management for the certain and clearly specified period, and namely the period of actual absence of economic activity and absence of Company’s income.
The decision on owner’s management of the Company should be taken and approved by the protocol of the Company’s general meeting or by the decision of the Company’s founder (owner).
The unofficial position of tax officers concerning the subject of this comment is as follows: Owner’s performing of functions of Company’s director without making a labor agreement is possible only in case the enterprise does not perform economic activity and does not get income.
According to clause 14.1.36 of the Tax Code of Ukraine, economic activity is a person’s activity which is connected with:
- production (manufacture) and / or sale of goods,
- performance of works,
- providing services,
- the one which is directed on getting income
This activity is performed by the person independently and / or through his standalone subdivisions, and also through any other person acting on the account of the first person (including under agreements of commission, commitments and agency agreements).
Thus, in case the Company produces goods, makes agreements for sale or agreements of purchase of goods and provides services (and especially when it gets profit for goods and services), then such a Company shall be considered as the one performing an economic activity. Therefore, owner’s (but not director’s) management of the Company in this case is impossible, since it performs economic activity.
Even on condition of compliance with all the above mentioned requirements and management of the Company directly through the owner, at present there is no guaranty that the tax service does not send to your Company a decision with a requirement to pay money penalty for failure to pay the personal income tax and the unified social tax. Legal precedents of the recent years in this case are controversial.
Thus, for example, in the case No. 2a-1870/1072/12, the court canceled the TVN (tax violation notification) of the tax service and sustained the claim of the Enterprise. In that way, the court recognized the legitimacy of owner’s management of the Enterprise, and it stated that “taking into consideration such provisions of the company’s statute, the court considers as ungrounded the defendant’s conclusion about that fact that while performing director’s duties, the founder of the enterprise was working based on the labor agreement and should have received salary as a payroll employee”.
In this case, the requirements concerning non-performance of economic activity were fulfilled, and more than that, the statue of the Enterprise proved directly and fixed the management and performance of director’s duties by the owner of the Enterprise.
While taking into consideration such court decisions, there arises the possibility (on condition that the requirements provided by part 2 of Article 65 of the Commercial Code of Ukraine are complied with) that the Company will have no unlawful charging with penalty sanctions on the part of the controlling authorities. But due to low legal culture and legal awareness of the officers of the controlling authorities, today it is impossible to guarantee the absence of SWA and other sanctions. Therefore you should consider of pros and contras while taking a decision about owner’s management of his Company.
In case you plan making a Company (or you are an owner of a Company) and you want to manage it independently, please call: 0 800 330 967