Taxation Principles for Shadow Directors and De Facto Directors of Maltese Companies: Between Formalism and Functionality in Polish Tax Law

 

The intensifying fiscalization of Polish tax authorities manifests itself through their systematic search for new grounds to challenge taxpayer-favorable solutions arising from double taxation treaties. One of the most controversial issues has become the taxation of remuneration received by persons undeniably performing directorial functions in Maltese companies, yet not disclosed in the Maltese commercial register. Tax authorities increasingly question whether payments received by such persons actually constitute directors’ remuneration within the meaning of Article 16 of the Polish-Maltese double taxation treaty, basing their argumentation solely on the formal criterion of the director’s lack of registration in the commercial register.

 

Introduction: Anatomy of an Interpretative Crisis

This practice presents a fascinating interpretative case where two fundamentally different legal philosophies dramatically collide. The Polish system, deeply rooted in Civil Law tradition, fetishizes formal appointment procedures and mandatory registration of company officers. The Maltese system, emerging from Common Law tradition, rejects this formalism in favor of a pragmatic functional approach, focusing on what a person actually does rather than their official title. A thorough analysis of Maltese provisions, case law, and principles of tax law interpretation leads to the conclusion that actual performance of directorial functions should determine the application of Article 16 of the treaty, regardless of the person’s formal registration status.

 

The Maltese Conceptual Revolution: When Function Prevails Over Form

To understand the essence of the dispute, one must first examine how Malta defines the concept of a director. The Maltese Companies Act introduces in Article 2 a definition that represents a true revolution compared to the Polish way of thinking about company bodies. According to this provision, a director means: “any person occupying the position of director of a company by whatever name he may be called carrying out substantially the same functions in relation to the direction of the company as those carried out by a director.”

This definition establishes a three-tier classification that encompasses not only formally appointed directors (de jure directors) but also shadow directors – persons in accordance with whose directions the formal directors act – and de facto directors – persons actually performing directorial functions without formal appointment. The key phrase “carrying out substantially the same functions” establishes the functional test as the primary qualification criterion. Maltese law unequivocally determines that the manner of performing duties, not formal status, determines a person’s legal classification as a director.

This approach stems from the fundamental principle of Anglo-Saxon law – substance over form. In the landmark case Re Hydrodan (Corby) Ltd, the English court stated that to recognize a person as a de facto director, the court would examine what functions the person actually performed, not what they called themselves or what others called them. This doctrine has been consistently implemented in the Maltese legal system, where actual performance of management functions automatically results in the duties and rights proper to a director, regardless of formal status.

For a Polish lawyer accustomed to a world where membership in a company body requires formal appointment by an authorized body, entry in the appropriate register, and a specific legal form of appointment act, the Maltese approach may seem revolutionary, even anarchic. This is, however, a false impression – Malta does not reject legal order but organizes it around different values. While the Polish legal system fetishizes procedures, the Maltese focuses on effect. While the Polish legislator asks whether someone has been formally appointed, the Maltese asks whether someone actually manages (implicitly – whether they have been allowed to manage by the company and its shareholders, which from a functional standpoint consumes the problem of the director’s appointment act).

 

Shadow Directors: Anatomy of the Phenomenon and Its Legal Consequences

The concept of shadow directors emerged in the common law system as a response to the growing need to assign responsibility to persons actually controlling companies but remaining in the shadows of formal corporate structures. As Samraddhi Mutha notes in her comprehensive study published in the Indian Journal of Integrated Research in Law, shadow directors are “those who exercise a great deal of influence over the business affairs of the company’s management” without formal appointment. These are figures who – as judges picturesquely describe in various judgments – “lurk in the shadows” as “puppet masters” controlling the company “as a cat controls the movements of its paw.”

The first formal reference to the concept of a shadow director in English law appeared in the Companies (Particulars as to Directors) Act 1917, which extended the term “director” to include “any person in accordance with whose directions or instructions the directors of a company are accustomed to act.” Although the act did not explicitly use the term “shadow director,” it clearly referred to this phenomenon. Over time, more and more legal systems in various countries extended the meaning of the term “director” to include shadow directors.

Case law has developed several criteria for identifying shadow directors. In Re Unisoft Group Ltd [1994] BCC 766, Justice Harman stated that the shadow director must be “the puppet master controlling the actions of the board.” The directors must be the “cat’s paw” of the shadow directors, regularly acting on their directions. The judgment indicates that in the case of a multi-member board, the whole board, or at least a governing majority, must be accustomed to act on the directions of an outsider, and these actions must be performed regularly as an established course of conduct.

Breakthrough significance came with the judgment in Secretary of State v. Deverell [2001] Ch 340, where the Court of Appeal significantly expanded the understanding of shadow directorship. Lord Justice Morritt stated: “The purpose of the legislation is to identify those, other than professional advisers, with real influence in the corporate affairs of the company. But it is not necessary that such influence should be exercised over the whole field of its corporate activities.” This judgment established several key interpretative principles. First, the influence must be real and need not cover all the company’s affairs. Second, it does not include those acting in a professional capacity – non-professional advice is to be considered. Third, the concepts of “direction” and “instruction” do not exclude the concept of “advice,” as all three share the common feature of “guidance.” Fourth, it is not necessary to establish that a shadow director dominates the de jure directors, casting them into a subservient role. Fifth, the surrender of discretion by the board is not necessary – a lesser level of influence is sufficient.

The issue of shadow directors’ fiduciary duties has been subject to significant evolution in case law. Initially, courts were reluctant to impose fiduciary duties on shadow directors, arguing that they did not assume direct responsibility for the company’s affairs. In Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638, the court held that the indirect influence exerted by a shadow director who did not deal directly with the company’s assets would not be enough to impose fiduciary duties upon him.

The breakthrough came in Vivendi SA v Richards & Ors [2013] EWHC 3006, which brought clarity to the issue of shadow directors’ duties. The court concluded that a shadow director owes fiduciary duties to the company and its creditors, at least for the directions and instructions given to the directors which he wanted them to act upon, as by doing so he is assuming responsibility. This judgment established the principle that shadow directors and de jure directors are equal in terms of their responsibilities to the company.

 

De Facto Directors: Between Practice and Legal Formalism

De facto directors are persons who, despite lacking formal appointment, actually perform directorial functions. They differ from shadow directors in that they act openly as directors, presenting themselves as persons exercising management functions, while shadow directors remain in the shadows, controlling the company through formally appointed directors. This category covers situations where a person actually manages the company, participates in making key business decisions, and is perceived by the business environment as a director, despite lacking formal appointment.

Case law has developed comprehensive criteria for identifying de facto directors. The first and most important criterion is making strategic decisions. A person who determines the company’s development directions, approves business plans, decides on significant investments or changes in organizational structure, performs functions reserved for the highest management level. This is not about advising or expressing opinions, but about actually making binding decisions that shape the company’s future.

Equally important is operational control, understood as supervision over the company’s current activities, managing its human and financial resources, and making decisions concerning daily operations. A person who actually leads a team, approves budgets, supervises project implementation, and is responsible for current financial results performs typical directorial functions regardless of their formal title.

The third criterion is external representation – acting on behalf of the company in contacts with contractors, financial institutions, administrative bodies, or media. If a person is perceived by the business environment as the actual decision-maker, if the most important negotiations are conducted with them and their position is treated as binding for the company, this indicates actual performance of directorial functions.

Systematic and continuous action is also crucial. Episodic advice or sporadic interventions do not make anyone a de facto director. It involves regular, long-term engagement in managing the company, which is not so much auxiliary as decisive in nature. A person who actually manages a company for months or years deserves the same tax treatment as a formal director.

Equally important are negative criteria that allow distinguishing a de facto director from other categories of persons cooperating with the company. First, functions performed by a potential de facto director cannot arise from an alternative legal basis – if a person acts under a service contract with a defined scope, an employment contract, or a typical consulting contract, it is difficult to speak of performing directorial functions. Second, these actions must go beyond the scope of ordinary advisory or consulting services – it is about actual management, not advising managers.

 

Linguistic Anatomy of Article 16: Hidden Meanings of an International Treaty

The key to properly understanding the problem is a linguistic analysis of Article 16 of the Polish-Maltese double taxation treaty. In the English version, the provision states that taxation applies to remuneration received by a resident of one state “in the capacity as a member of the board of directors or of the supervisory board or of any other similar organ of a company” being a resident of the other state.

Every word in this formulation matters. The phrase “in his capacity as” in legal English means acting in a specific functional role, not possessing formal administrative status. The Oxford Dictionary of Law defines “capacity” as legal competence or ability to act in a specific role. This is not an accidental formulation – the treaty’s drafters consciously chose “capacity” instead of “status,” “position,” or “appointment,” thus signaling that functioning, not formal nomination, is what matters.

Equally significant is the phrase “any other similar organ of a company.” This is a deliberate legislative device aimed at eliminating formalism. This phrase extends the provision’s scope to all forms of management bodies, completely regardless of their name, method of registration, or terminology used in individual legal systems. If the treaty’s drafters wanted to limit its application solely to formally appointed directors, they would not have used such broad wording.

When we juxtapose this linguistic analysis with the Maltese definition of director, the picture becomes crystal clear. The international treaty, using functional terminology, harmonizes with the Maltese approach based on the test of actual performance of duties. This harmony is not accidental – it reflects international consensus on the need for a functional approach to identifying persons performing management functions in the era of economic globalization.

 

Systemic Interpretation in Light of International Treaty Interpretation Rules

The interpretation of international treaties is subject to strict rules arising from Article 31 of the Vienna Convention on the Law of Treaties of 1969. According to this provision, treaties must be interpreted in good faith, in accordance with the ordinary meaning of terms in their context, and in light of the treaty’s object and purpose. Each of these rules supports a functional interpretation of Article 16 of the Polish-Maltese treaty.

The ordinary meaning of terms, as demonstrated above, indicates a functional criterion. The treaty’s context – as an instrument intended to eliminate double taxation – supports a broad interpretation that will not create artificial barriers to achieving this goal. Finally, the treaty’s object and purpose – ensuring the avoidance of double taxation – would be seriously compromised if identical functions were subject to different tax treatment solely because of formal differences in the signatory states’ legal systems.

This interpretation finds confirmation in international practice. The OECD Commentary on Article 16 of the Model Convention emphasizes that the provision applies to persons “acting in the capacity of members of the board of directors.” This wording clearly indicates a functional rather than formal criterion. The practice of OECD countries confirms the trend toward broad interpretation of this provision, taking into account the diversity of corporate structures in individual jurisdictions.

Additionally, it should be borne in mind that interpretation of international treaties should take into account the specificity of the signatory states’ legal systems. Malta, by adopting a broad definition of director, signals that in its legal system function is more important than form. Ignoring this specificity by Polish tax authorities means de facto imposing Polish legal solutions on Maltese institutions, which contradicts basic principles of international law.

 

Shadow and De Facto Directors’ Liability in the Context of Insolvency

Analysis of fraudulent trading and wrongful trading cases provides additional arguments for a functional approach to identifying directors. These legal institutions, developed in the common law system and adapted by Maltese law, show the consequences of recognizing someone as a director regardless of formal status.

Fraudulent trading occurs when business is carried on with intent to defraud creditors or for fraudulent purposes. Wrongful trading refers to a situation where a company has reached a state of effective insolvency and continues to trade despite the directors being aware, or ought to have been aware, that there was no reasonable prospect of avoiding dissolution due to insolvency.

In the landmark judgment in the Price Club case in Malta, the court found directors guilty of both fraudulent and wrongful trading. Importantly, in its judgment, the court did not differentiate between these two offenses, treating them as complementary aspects of irresponsible company management in the face of insolvency. The liquidator of Price Club Operators Limited filed suits against the company’s three directors, charging them with fraudulent trading and demanding piercing of the corporate veil and personal liability for the company’s debts.

This case illustrates how Maltese courts apply the functional test to determine the circle of responsible persons. The court analyzed not only formal appointment but primarily the actual manner of exercising control over the company, making key business decisions, and impact on creditors’ fate. This analysis confirms that in the Maltese legal system, actual performance of directorial functions is decisive for assigning responsibility.

In both the Maltese and British systems, shadow directors are subject to identical liability as formal directors. In fraudulent trading cases, they must answer for conducting business with intent to defraud creditors. In wrongful trading cases, they bear responsibility for continuing operations despite awareness of inevitable insolvency. This equality in terms of liability confirms that the distinction between formal and informal directors is purely technical and should not lead to different tax treatment.

 

Critique of Tax Authorities’ Methodology: Systematic Interpretative Errors

Analysis of the reasoning in negative interpretations and tax decisions issued by Polish authorities reveals a series of fundamental methodological errors that undermine the credibility of the entire interpretative process. The most glaring example is basing key decisions on source material of questionable scientific value – Wikipedia articles.

Wikipedia, while undoubtedly useful as a starting point for further research, by design cannot serve as a basis for interpreting complex legal issues. The openness of this project, allowing anyone to edit anonymously, creates space for abuse and manipulation, especially in matters with potential financial implications. The phenomenon of “edit wars” points to a fundamental problem: in controversial matters, an article’s content may reflect not so much objective knowledge as the dominance of one side in an editorial conflict. When tax authorities base their decisions on such an unreliable source, they undermine trust in the entire tax interpretation system.

The second systematic error is ignoring or superficial analysis of key legal arguments presented by taxpayers. Tax authorities routinely omit analysis of a director’s legal status in a Maltese company, do not consider systemic differences between Maltese and Polish law, and do not analyze the meaning of the English version of Article 16 of the treaty. Such an approach leads to issuing decisions based on incomplete legal analysis, which violates basic standards of procedural integrity.

The third error is violation of the in dubio pro tributario principle. In cases of interpretative doubt, authorities should adopt an interpretation favorable to the taxpayer, yet in practice we observe the opposite tendency – seeking the most restrictive interpretation, even at the cost of legal logic and tax justice. This practice is particularly dangerous in the context of international treaties, where systemic differences between signatory states naturally generate areas of interpretative uncertainty.

Finally, tax authorities engage in arbitrary changes of interpretative line without changes in the legal status, which violates the fundamental principle of legal certainty. Entrepreneurs who acted in accordance with authorities’ previous practice have been placed in a situation of ex post facto law violation, which contradicts the constitutional principle of protecting acquired rights and taxpayers’ legitimate expectations.

 

The Argument of Proportionality and Systemic Justice

Applying the proportionality test to current tax authority practice leads to an unequivocal conclusion about its inadequacy. Shadow directors and de facto directors bear the same legal responsibility as formal directors – they are subject to the same fiduciary duties, can be held liable for the company’s actions, are obligated to act in the best interest of the company and its shareholders. They perform identical management functions, make the same strategic decisions, bear the same responsibility for the company’s results.

This is an interesting element of the Anglo-Saxon system, where the very concept of shadow directors arose in order to be able to assign responsibility for company affairs to persons who actually manage the company, even if they have not been disclosed in the register. This system recognizes that actual control and influence over the company’s fate are more important than formal appointment procedures.

In this situation, differentiating tax treatment solely based on formal entry in the register is disproportionate to the intended purpose and leads to arbitrary discrimination. If a person is a director for purposes of legal liability, it is logical that they should be treated as a director for tax purposes as well.

This discrimination becomes even more glaring when we consider that shadow directors often consciously forgo formal director status for justified business reasons – for example, due to limitations arising from holding other positions, requirements regarding incompatibility of positions, or privacy preferences. Penalizing such choices through the tax system means that tax law becomes a tool for forcing specific organizational solutions, which goes beyond its proper function.

 

European Perspective and International Standards

Contemporary tax law is evolving toward harmonization and considering economic reality over legal formalisms. Council Directive 2011/16/EU on administrative cooperation in the field of taxation adopts a functional approach to defining beneficial ownership, focusing on actual control rather than formal ownership structures. An analogous way of thinking should be applied to interpreting Article 16 of double taxation treaties.

OECD international standards are also moving toward a substance-over-form approach. Transfer pricing guidelines, anti-avoidance regulations, and new rules on taxation of the digital economy – all these instruments share one thing: focus on the economic substance of transactions rather than their formal structure. Interpreting Article 16 of the treaty solely through the prism of formal registration status is anachronistic and contrary to international trends in tax law.

Additionally, in an era of deepening European integration and free movement of persons, goods, services, and capital, creating artificial barriers based on differences in the legal constructions of individual member states contradicts the spirit of European integration. The European Union consistently seeks to eliminate such barriers, and Polish tax authorities, by interpreting international treaties in a way that discriminates based on systemic differences, act against this tendency.

It is also worth noting that the functional approach is consistent with general principles of EU law interpretation, which require consideration of the regulation’s purpose and effectiveness (effet utile). Formalistic interpretation that ignores economic reality undermines the effectiveness of double taxation treaties and may lead to violation of fundamental freedoms guaranteed by the Treaty on the Functioning of the European Union.

 

Conclusions: Toward Fair Taxation in the Era of Globalization

The conducted analysis leads to an unequivocal conclusion that actual performance of directorial functions should determine the application of Article 16 of the Polish-Maltese double taxation treaty, regardless of formal entry in the Maltese commercial register. This interpretation is consistent with the letter of the treaty, respects the specificity of the Maltese legal system, prevents unjustified tax discrimination, and achieves the treaty’s fundamental goal of eliminating double taxation.

The current practice of Polish tax authorities, based solely on formal criteria, is methodologically flawed and leads to violation of basic principles of tax justice. It ignores differences between legal systems, fetishizes formal procedures at the expense of analyzing economic reality, and creates arbitrary barriers for taxpayers operating in international business structures.

In the context of increasing international mobility, development of holding structures, and increasingly complex forms of business organization, it is necessary for Polish tax authorities to adopt a more flexible and functional approach. Only in this way can we ensure that the tax system responds to the challenges of the modern economy without creating unjustified barriers to legitimate business activity.

It is crucial to understand that differences between legal systems cannot be used as a pretext to deny taxpayers’ rights arising from international treaties. When Malta recognizes certain persons as directors based on a functional test, Poland should respect this qualification for purposes of applying the double taxation treaty. A different approach leads to a situation where the same person, performing the same functions, is treated differently depending on which tax authority makes the assessment – which contradicts the basic idea of double taxation treaties.

It should also be emphasized that the proposed interpretation does not mean opening the door to tax abuse. On the contrary, the functional test allows for more precise identification of persons actually managing companies and receiving remuneration for this. The formalistic approach may paradoxically facilitate tax avoidance by creating artificial structures in which persons actually managing remain outside the formal registration system.

In a broader context, adopting a functional approach to interpreting provisions concerning taxation of directors’ remuneration is a step toward modernizing Polish tax law. In the era of the digital economy, where traditional concepts of place of business and formal corporate structures are losing significance, interpretative flexibility becomes not only desirable but necessary.

Finally, it should be noted that the proposed approach is consistent with the general trend in international tax law moving toward greater transparency and focus on the actual economic substance of transactions. Initiatives such as the OECD’s BEPS (Base Erosion and Profit Shifting) show that the international community is determined to ensure that tax systems reflect economic reality rather than legal constructions.