Doing Business in Poland & Lithuania: Profitability and Shareholder Compensation

To illustrate the combined impact of corporate income tax (CIT) and employment costs, we modeled four representative companies ranging from micro to large enterprises. Each model demonstrates how revenue, employee salaries, and tax rates influence net monthly profits in Poland and Lithuania. This analysis highlights the practical differences in profitability and provides a foundation for understanding how company size, labor costs, and taxation interact across both markets.

Four Business Models: From Micro to Large Enterprises

Four model companies were used to illustrate the combined effect of CIT and labor costs:

1. Model A – micro business: 10,000 EUR revenue per month, 1 employee with a salary of 2,000 EUR gross.

2. Model B – small business: 40,000 EUR revenue per month, 5 employees with a salary of 2,000 EUR gross.

3. Model C – growth company: 100,000 EUR revenue per month, 5 employees with a salary at 5,000 EUR gross.

4. Model D – big company: 300,000 EUR revenue per month, 5 employees with a salary at 5,000 EUR gross, 5 employees with a salary of 2,000 EUR gross.

Summary Table of Monthly Net Profit: Simplified Model

Please note that for the calculations presented in the table below, the only cost deducted from the company’s revenue to determine the monthly net profit (after CIT) was the total employer cost of employees’ salaries. No other expenses were considered in these sample figures. 

What is worth mentioning is that in respect of small and medium entities (gaining significantly over EUR 300,000 but less than EUR 2,000,000), the overall tax burden in Poland might be lower, as the preferential 9% tax rate applies up to EUR 2,000,000 and not EUR 300,000 as in the case of the reduced 7% CIT rate in Lithuania.

Methods of Distributing Profit to Shareholders

Once the company generates profit, shareholders may extract funds through several different channels. Each has distinct tax and social security consequences in Poland and Lithuania.

Dividends

Dividends are the most straightforward method of profit distribution. In Poland, dividends paid to individuals are subject to a 19% flat-rate tax. In Lithuania, dividends are generally taxed at 15% personal income tax rate. Neither country applies social security contributions to standard dividend income.

Employment Contract With the Shareholder

An owner can also be employed by their own company under a standard employment contract. In Poland, this solution is usually very expensive because it triggers full social contributions on both sides, the employer and the employee, plus PIT. 

In Lithuania, costs are lower but still typically higher than simple dividend distribution. For this reason, employment contracts for shareholders are normally used only when there is a genuine, operational employment relationship, not primarily for profit extraction. Article 101(1) of the Labor Code requires that an employment contract be concluded with the sole management body of a legal entity, e.g., a natural person acting as the company’s director, if they work and perform their functions for remuneration, except for directors of small partnerships and sole proprietorships. Such a contract may, of course, be for less than full-time

Management Board Appointment (Powołanie) – Poland

Polish law allows a management board member to receive remuneration under a civil-law appointment (“powołanie”). Such remuneration is subject to personal income tax but may be exempt from social security contributions, depending on the circumstances. This makes it a tax-efficient tool for compensating key managers and, in owner-managed companies, for combining salary‑like income with dividend distributions.

In Lithuania, management board members may receive remuneration in the form of “tantjemos” (profit-based payments) or under a civil contract. “Tantjemos” are taxed as A-class income and subject to personal income tax and full employee-side social security contributions, while no employer-side social contributions are due. Remuneration under a civil contract is also taxed with PIT and social security contributions, similarly to employment-like income. Unlike in Poland, Lithuania does not provide a social security exemption for board remuneration based solely on appointment, making the Lithuanian model less flexible from a tax-planning perspective.

B2B Contracts: Self-Employed Management

In both Poland and Lithuania, it is common that high-earning specialists or executives perform operational or project-based activities through their own business entities (B2B contracts). Such arrangements may reduce the social security burden or allow the use of favorable tax regimes.

However, corporate governance and statutory management functions, e.g., serving as a management board member, director, or signing authority, generally cannot be outsourced via B2B contracts and must be remunerated under the appropriate legal basis, e.g., appointment, employment, or profit-based payments such as “tantjemos” in Lithuania.

Tax authorities in both countries actively monitor B2B arrangements for indicators of disguised employment or recharacterization risks, so careful structuring and clear role separation are essential.

Conclusion

While Lithuania’s lower employer contributions can reduce labor costs, Poland’s preferential CIT rates for small and medium-sized entities may result in lower taxes for certain revenue ranges. When it comes to distributing profits, shareholders can choose from dividends, employment contracts, management board appointments, or B2B arrangements, each with distinct tax and social security implications in Poland and Lithuania. 

In the next article of this series, we will explore tax reliefs and preferences, focusing on how businesses can leverage available incentives to reduce costs and enhance profitability.