The published draft amendment to the Income Tax Act of September 15 2020 indicates that the Polish legislator decided to tax limited partnerships with CIT (corporate income tax), starting from 2021. Only the income generated by these companies until the end of 2020 will be taxed under the current rules. Therefore, limited partnerships taxation shall be changed in a substantial way after the amendment is implemented in the legislation.
The above means that the currently popular limited partnerships (about 50 thousand entities) will be taxed twice – firstly the company will deduct 19% (or 9%) of CIT on its profit, and then its partners will pay 19% PIT on the profit to be paid.
There are two types of partners in a limited partnership: general partners who bear full responsibility for the obligations of the partnership and limited partners (passive investors). The first type of partner, when paying the profit, will be able to deduct the CIT tax paid by the company on the income of this company from the PIT tax, which means that the general partner will not “lose” under the new taxation rules.
Unfortunately, the legislator did not provide such a mechanism in relation to limited partners – as a result, these partners will pay double tax. The draft amendment provides for an exception of only marginal importance – the income of the limited partners obtained through the limited partnership will be exempt in the amount corresponding to 50% of the revenues obtained by the limited partner from the participation in the profits in the limited partnership. However, no more than PLN 60,000 of such revenues obtained separately in the tax year from profit participation in any such limited partnership in which the taxpayer is a limited partner.
Furthermore, the above is subject to a number of conditions, i.e. a limited partner may not:
have directly or indirectly over 5% of shares (stocks) in a company with legal personality or a capital company in an organization being a general partner in this limited partnership;
be a member of the management board of a general partner of a limited partnership;
be an entity related to a partner or a member of the management board.
The above introduced changes to the legislation mean that the popular form of limited partnerships in which the general partner is a limited liability company, linked to limited partners, will lose its attractiveness.
As can be read from the justification of the draft amendment, the aim of the amendment is to tighten the tax system and to respond to optimization structures created by taxpayers with the use of limited partnerships by granting the limited partnership the status of an income tax payer. However, it is understood that the legislator’s intention is simply to increase the tax burden on the corporate sector. Therefore, the structures of limited partnerships in which the general partner is a limited liability company were not used for illegal tax optimization, but as an alternative for limited liability companies – that is, a much simpler structure, but characterized by double taxation of their profits.
While reading new Polish regulations regarding taxation they leave a sad reflection that Polish business cannot rely on legal certainty and that the rules of taxation taken for granted may change in a very short period of time. It is worth adding that the Polish legislator’s action is fundamentally inconsistent with the conclusions of the judgment of the Constitutional Tribunal of February 10, 2015 (file reference number P 10/11). The judgement stated that the legislator cannot surprise taxpayers and make such changes that taxpayers could not foresee.
Entrepreneurs operating in the form of limited partnerships should rethink future business plans, because it may be advisable to change the form of business to a different type of partnership or limited liability company, eg. benefiting from tax preferences resulting from the “Estonian” CIT.
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*This article is for general information purposes only and does not constitute a legal advice.