In its resolution of 21 February 2024, the Supreme Court, composed of three judges, found that a partner in a two-member limited liability company, holding 99 percent of shares, is not subject to mandatory social insurance (ref. no. III UZP 8/23).
The facts involved a limited liability company with two partners, one of whom was the dominant partner and held 99% of the shares. Typically, this type of share division (transferring a minimal number of shares to the second partner) is a way to avoid paying social security contributions. Partners in limited liability companies are not subject to mandatory social security contributions (however, the company must have at least two partners). Pursuant to the Social Security System Act, only partners in so-called "single-member" limited liability companies, i.e., those with a single partner, pay contributions.
In the aforementioned factual circumstances, the majority shareholder had insurance under his employment contract with the company. The Social Insurance Institution (ZUS) challenged this approach because, according to ZUS, a shareholder holding 99% of the shares should be treated as the sole shareholder and therefore subject to insurance. ZUS also assumes that a 1% shareholding is an illusory value and significantly low enough to constitute a company with more than one shareholder, in which the partners are exempt from ZUS contributions.
The case went to trial, and the District Court ruled in favor of ZUS (Social Insurance Institution). An appeal was filed against the first-instance court's judgment. The Court of Appeal questioned the District Court's interpretation and referred the following legal question to the Supreme Court: Is a shareholder in a two-member limited liability company, holding 99% of the shares, which gives them the ability to freely shape the content of resolutions at the shareholders' meeting and make decisions regarding the company's operations, subject to social security contributions in the same way as a shareholder in a single-member limited liability company?
The Supreme Court has repeatedly ruled on the case of partners with unequal numbers of shares, such as the one in the case described above, deeming the minority shareholder an illusory partner. Consequently, the majority shareholder was required to pay contributions as if he were the sole shareholder of a limited liability company.
Unfortunately, the case law is inconsistent and this raises doubts among many lawyers and entrepreneurs, which is why the 90/10 rule has been used so far to avoid covering the majority shareholder with insurance.
In its resolution, the Supreme Court found that a shareholder of a single-member limited liability company holding 99% of shares is not subject to social insurance under Article 6, paragraph 1, point 5 in connection with Article 8, paragraph 6, point 4 of the Act on the Social Insurance System.
This ruling is significant for small business owners, especially those with unequal shareholdings in limited liability companies. Previous practice often led to disputes with the Social Insurance Institution (ZUS), but now it appears there is a clear legal justification for such actions.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of May 8, 2024
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