The resolution of the Polish Supreme Court of February 21, 2024 (case no. III UZP 8/23) shed new light on the issue of whether partners in limited liability companies are subject to mandatory social insurance, stating that a partner of a two-person limited liability company holding 99 percent of the shares is not subject to social insurance under Art. 6 section 1 point 5 in connection with Art. 8 section 6 point 4 of the Act of 13 October 1998 on the social security system.
But What Does It Mean for You and Your Company?
This article will guide you through the ins and outs of the issue of whether partners of a limited liability company are subject to social insurance and help you understand the impact of this resolution on the applicable legal situation in this regard.
The Essence of a Polish LLC
- A limited liability company is a capital commercial company with legal personality.
- It may be established for any legally permissible purpose by one or more partners, but it cannot be established solely by another single-member limited liability company.
- Its founders may be natural persons or legal persons, regardless of citizenship and place of residence.
- This form of business is suitable – for example – for partners who want to maintain direct supervision over the company’s affairs and limit the risk only to their contribution.
- To establish a limited liability company capital of at least PLN 5,000 is required.
What is Social Insurance?
Social insurance is a type of insurance whose aim is to ensure social security for people who, due to the occurrence of random events specified by law (e.g. illness, disability, pregnancy, old age), cannot support themselves from their own work.
Types of social insurance in Poland depending on the type of events covered by insurance:
- Pension insurance – the subject of protection is the achievement of a specified age by the insured person
- Disability insurance – the subject of protection is inability to work or death of the breadwinner
- Sickness insurance – the subject of protection is inability to work caused by illness, parenthood or the need to care for a family member
- Accident insurance – the subject of protection is inability to work caused by an event classified as an accident at work or an occupational disease
Social security can be mandatory, voluntary or non-covering depending on your professional or social situation.
Mandatory Social Insurance for Entrepreneurs
If a person is an entrepreneur or cooperates with one, they are a subject of compulsory insurance: retirement, disability and accident insurance. Sickness insurance is voluntary for them.
Mandatory Social Insurance in a Limited Liability Company
The legal definition of an entrepreneur includes shareholders of a single-member limited liability company and partners in a general partnership, limited partnership, or partnership. Therefore, the law does not apply to all types of capital companies, but only to a single-member limited liability company. However, this requirement does not apply to every kind of business, but specifically to those who are the sole owners of a limited liability company.
Two-person Limited Liability Company and Social Insurance Obligations
When it comes to a two-person limited liability company, regardless of the number and value of their shares, the shareholders do not fall under the literal regulations of social insurance. The Polish law does not provide for such a title for insurance, namely the title of a shareholder of a two-person limited liability company.
According to the regulations, only shareholders of single-member limited liability companies are obliged to pay social insurance contributions from the day they acquire the status of a company shareholder until the day they lose this status.
It might seem that by allowing other shareholders to participate in the company by transferring them a small number of shares in the company’s share capital while maintaining the predominant capital involvement of the existing sole shareholder, the shareholder of a single-member limited liability company should have guaranteed the possibility of effective cost optimization related to paying social insurance contributions.
However, in reality, it has looked quite different until now.
The State Approach on the Subject
The Social Insurance Institution (ZUS), and later the courts, took a stance that seemed to go against the straightforward rules of the law. This was about cases where a shareholder in an LLC had such a big share that the other shareholders (usually just one) couldn’t really affect the company’s decisions. ZUS saw such a major shareholder as if they were running their own business alone.
In situations where LLCs had just two shareholders, ZUS began processes and made decisions that the shareholder with the dominant share should pay social insurance contributions. And not just for now, but going back several years, because in ZUS point of view, this person “owned almost all the company.” So, ZUS was treating these major shareholders as if they were the sole owner of their LLCs.
Example: Mr. Jones and Mr. Black decided to form a limited liability company. Mr. Jones owned 90% of the shares and Mr. Black 10%. ZUS recognized Mr Jones as a major shareholder and decided he should be treated as a sole shareholder and as a result – be a subject of a mandatory social insurance. |
The courts also started to see it this way, saying that an LLC could be considered a one-person show even if the major shareholder didn’t hold every single share. The Supreme Court made the first ruling like this on August 3, 2011. And mostly, this way of thinking stayed the same in the courts, with a few exceptions, all the way up to 2024.
What Changed in 2024?
The resolution of the Polish Supreme Court of February 21, 2024, presented a whole new approach.
The Supreme Court agreed with the interpretation of the regulations directly, stating that “a partner of a two-person limited liability company holding 99 percent of the shares is not subject to social insurance under Art. 6 section 1 point 5 in connection with Art. 8 section 6 point 4 of the social security system regulation.”
What Does This Mean for Entrepreneurs?
Polish law is not a law of precedents. The above-mentioned resolution of the Supreme Court is binding only in case no. III UZP 8/23.
However, for the first time in years, the Supreme Court changed its opinion on the issue of compulsory social insurance in a limited liability company with two shareholders.
Assuming that the position of the Supreme Court will be upheld in subsequent judgments, in each case when the partners of a limited liability company are at least two entities, including the majority shareholder who is a natural person, this partner will not be obliged to pay social security and health insurance contributions.
In many cases, such a partner, due to the overlapping of insurance titles (e.g. running a business), in practice was not obliged to pay social security contributions anyway. However, in the case of health insurance, there is no overlap between insurance titles, which meant that it was necessary to pay a health insurance premium for each insurance title separately (e.g. running a business and the status of a partner in a single-member limited liability company).
Nevertheless, it should be borne in mind that the position of ZUS in a limited liability company, despite the resolution adopted by the Supreme Court, will certainly not change quickly.
If you are the majority shareholder of a limited liability company and would like to verify your possibilities regarding social security and health insurance contributions in connection with the resolution of the Supreme Court, please contact us. We will check whether you have a chance for a more favorable settlement and determine the best course of action for you.
