Question. Does the owner of a farm have to employ himself if he works for his own company? This means that he is fully responsible for his own economic activity, starting with the management and organisation of his business, both by participating in the production and marketing process himself, i.e. by producing the goods and then selling them, and by carrying out management functions. What legal relationship must be established and what taxes are payable in our case?
Answer. This is one of the most frequently discussed issues regarding the interpretation of laws and regulations (Labour Law, Law on Individual (Family) Enterprises and Farmer's or Fisherman's Farms) among various lawyers and public authorities. However, a deeper look into the issue leads me to the conclusion that the very essence of the issue is about the obligation to pay taxes. In this respect, in order to avoid unnecessary misunderstandings, my suggestion would be to further study the website of the State Revenue Service in the section „Questions and Answers” (www.vid.gov.lv).
Taking into account the provisions of the Law on Individual (Family) Enterprises and Farmer's or Fisherman's Farms in conjunction with the requirements of the Labour Law and the general position expressed by both independent lawyers and various public authorities on public officials (including Z/S owners) and employment relations, I consider that the Z/S owner is not obliged to conclude an employment contract if the relationship in question is not characteristic of an employment relationship.
It should be noted, moreover, that according to the provisions of Article 44(3) of the Labour Law, which stipulates that members of the executive bodies of a capital company shall have an employment contract unless they are employed on the basis of another civil law contract. If members of the executive bodies of a capital company are employed on the basis of an employment contract, the contract shall be concluded for a fixed period.
In other words, given that the owner of the L/S in the present case will, however, be more of an employer than an employee in substance, since he is the one who organises, manages, markets the products, etc., together with the fact that another civil law contract can be understood as the relationship between the L/S as a legal person and its owner, (a relationship) which is based primarily on the principle of executive authority. In other words, the owner of the L/S is primarily the representative (founder) of the legal person, with the result that the question whether it is compulsory to conclude an employment contract with him or her is not compulsory.
At the beginning of 2012, the magazine „Jurista vārds” (Lawyer's Word) had a wide-ranging discussion on the employment of board members and the consequences thereof, with experts from various fields giving their views (e.g, www.juristavards.lv). These discussions also addressed the issue of tax obligations.
In this case, I have found that in this situation, the Z/S would be liable to personal income tax if there is taxable income. As regards compulsory contributions to State social insurance, it is necessary to assess whether the owner of the Z/S/S is an employee within the meaning of the Law on State Social Insurance.
According to the provisions of Section 1(3)(i) of the Law on State Social Insurance, a self-employed person is the owner of a farm (fishery) holding who, not being in an employment relationship with the management body of his/her farm (fishery) holding, performs the management function of that farm (fishery) holding, if no manager (director) has been appointed (elected) for that farm (fishery) holding in accordance with the procedure laid down by law.
In addition, Section 5(5) of the said Law provides that self-employed persons and persons referred to in Sections 2 and 3 of this Article are socially insured if they have actually paid social insurance contributions.
Therefore, taking into account the above legal provisions, I conclude that the owner of the Z/S must pay personal income tax if there is a tax to calculate it from. However, the owner of the Z/S may pay the compulsory State social insurance contributions voluntarily, since according to the provisions of Section 5 (1) and (2) of the Law „On State Social Insurance”, the owner of the Z/S is not compulsorily subject to social insurance.
