15 December 2020

Limited partnerships with income tax (CIT) – summary

The Act on taxing limited partnerships with CIT has been signed by the President of the Republic of Poland and published on November 29th. The amendment also introduces separate provisions on flat-rate income tax (the so-called Estonian CIT). The Ministry of Finance counts on 2 billion PLN annually in budget revenues from almost 40,5 thousand PLN limited partnerships registered in Poland.

The new regulations will come into force on January 1st, 2021.

Taxation of limited partnerships

Until now, only a limited joint-stock partnership was a CIT payer. In other forms of business partnerships, only partners have been subject to income tax so far, while the economic entity itself is subject to VAT and excise duty. Therefore, the new law will affect small and family businesses the most. New rules will establish double taxation – on an economic entity and each business partner separately.

The CIT rates for limited partnerships are predetermined according to the national standard: 19% or reduced 9%. The preferential tax rate is available to companies whose income does not exceed the equivalent of 2 million EUR per year. Thus, after paying the tax on the company’s income primarily, the shareholder should still remember about the income tax tied to profits distribution.

The tax obligation for business partners depends on the status of the given partner in the company’s structure (limited partner or general partner). As a rule, each partner will have to pay income tax (PIT).

The context of changes

According to the official statement of the Ministry of Finance, imposing a tax on limited partnerships and some general partnerships should prevent tax avoidance crimes in the future through the practice of the foreign transfer. The Union of Entrepreneurs and Employers’ calculations show that only 1 percent of all limited partnerships have a foreign partner.

Unfortunately, no matter how marginal the illegal practices turn out to be, all limited partnerships will be charged with the tax – regardless of the status of a partner or ownership structure. The Law does not provide for exceptions to the rule or instances allowing for avoidance of taxation.

Not only limited partnerships. CIT also for some general partnerships

An often-overlooked detail related to the CIT Act amendment is the inclusion of selected general partnerships in the regulation. Representatives of those limited partnerships who decide to restructure as a response to the risk of double taxation and are considering a general partnership should keep this in mind.

Conditions for a general partnership to be eligible for CIT:

• having headquarters or management board in the territory of Poland;
• at least one among the company’s partners is a legal person;
• the general partnership should not submit to the head of the tax office information on PIT taxpayers who have the right to participate in the company’s profit (or update this information) before the beginning of the financial year.

Limited partnerships and Estonian CIT

Parallel to CIT changes, the government has also adopted new regulations on the so-called Estonian CIT (learn more about this topic here). The new, pro-investment taxation system will come into force on January 1st, 2021. Unfortunately, limited partnerships will not be able to take advantage of new solutions. Such an option will only be granted to capital companies – in Poland, therefore, mainly limited liability companies and joint-stock companies.

A limited partnership, even after introducing CIT taxation, still formally remains a partnership.

Transitional provisions. CIT from May 1, 2021?

Important information for limited partnerships results from art. 12 (2) of the amending Law:

A limited partnership may decide that the provisions of the acts amended in art. 1 and art. 2, as amended by this Act, shall apply to this company and the revenues and costs related to participation in this company from May 1st, 2021.

The paragraph indicates the possibility of postponing the obligation of the provisions until the beginning of May 2021. This will require a statement of intent to postpone the tax system transition. Note, it should be done before January 1st, 2021 – when the regulations will come into force.

Moreover, if the last day of the limited partnership’s financial year falls in the period from December 31st, 2020, to March 31st, 2021, the company may not close the accounting books and continue the financial year until April 30th, 2021.

For this purpose, a Resolution of the General Meeting of Shareholders changing the financial year is necessary. On the day preceding the day a limited partnership acquires the status of a CIT taxpayer, the partnership is obliged to close its accounting books. Unfortunately, this shift does not release from the obligation to settle income tax with partners for the period in line with their financial year.

It should also be noted that a limited partnership and a general partnership, after obtaining the CIT payer status, cannot account for the loss from the period of the company’s transparency. Income and costs from this period were assigned and settled by the partners of these companies.

CIT exemption for a limited partner

For a limited partner of a limited partnership, the CIT Law provides for the possibility of exempting from taxation the amount constituting 50% of revenues obtained from participation in profits in a limited partnership established in Poland, but not more than 60 thousand PLN in a tax year. However, the above exemption cannot be applied to a limited partner who holds at least 5% of shares in this company or is a member of the management board of a company with at least 5% shares in a limited partnership.