Planned rules for imposing corporate income tax on limited partnerships from 2021
The guidelines for imposing corporate income tax on limited partnerships and some registered partnerships have now been stated with more specificity. On 16 September 2020 a draft Act Amending the Personal Income Tax Act, the Corporate Income Tax Act, the Act on Flat-Rate Taxation of Certain Income of Natural Persons, and Certain Other Acts (draft no. UD126) was published on the website of Poland’s Government Legislation Centre. The draft and the extensive justification for the proposal provide details of the rules for taxation of limited partnerships from 2021 forward. It should be borne in mind that these rules may change during the course of the legislative process.
Limited partnerships and some registered partnerships to become CIT payers
All limited partnerships (spółki komandytyowe) are to become CIT payers, regardless of their specific characteristics, such as the type of business they pursue, the amount of income they generate, their ownership structure, or the status of the partners.
Certain registered partnerships (spółki jawne) are also to be become CIT payers, specifically those with their registered office or management in Poland and meeting both the following conditions:
- The partners are not exclusively natural persons.
- Prior to commencement of the financial year, the registered partnership has not filed information on payers of PIT or CIT holding, directly or through entities that are not income tax payers, rights to a share in the profit of the partnership, or fails to update such information within 14 days of a change in the information.
Amended rules for taxation of all limited partnerships and their partners
The amended regulations on income tax on limited partnerships and their partners are to enter into force on 1 January 2021. All limited partnerships are to be required to close out their accounts as of 31 December 2020, and the changes would thus cover all limited partnerships from the start of the new year regardless of whether they use the calendar year as their current financial year.
Distribution of profits of limited partnerships earned through the end of 2020
Distribution of profits generated by limited partnerships through 31 December 2020 are to be taxed under current rules regardless of when the profits are distributed, i.e. they will not be subject to income tax.
Distribution of profits of limited partnership to a general partner
Distribution of profits generated by a limited partnership to a general partner (komplementariusz) is to be taxed once. The general partner will be entitled to deduct from the profit the value of the tax paid by the limited partnership, pro rata to the general partner’s share in the profit of the limited partnership.
However, the general partner will no longer be able to consolidate the taxable income earned in the limited partnership with a possible tax loss from other business sources.
Distribution of profits of limited partnership to a limited partner
Distribution of profits generated by a limited partnership to a limited partner (komandytariusz) is generally to be taxed twice, at the level of the limited partnership and at the level of the limited partner.
There would be an exemption from taxation for up to 50% (but no more than PLN 60,000) of a limited partner’s profits during a tax year (separately for each limited partnership), if all the following conditions are met:
- The limited partner does not hold, directly or indirectly, over 5% of the shares in a corporate entity with legal personality or in organisation which is a general partner of the limited partnership.
- The limited partner is not a member of the management board of a general partner of the limited partnership.
- The limited partner is not affiliated with a shareholder or management board member of a general partner of the limited partnership.
Additionally, this exemption would not apply in instances where links between general partners of the limited partnership or the manner of directing the partnership indicates that the partnership was established with the aim of tax optimisation.
CIT rate for taxation of income of limited partnership
A limited partnership would be required to pay CIT on its income under the same rules as currently in force for a limited-liability company (sp. z o.o.), joint-stock company (SA) or joint-stock limited partnership (SKA), i.e. at the basic CIT rate of 19%, or the preferential rate of 9% if the partnership’s annual revenue does not exceed EUR 2 million (the draft also proposed to increase the annual limit allowing application of the 9% CIT rate from EUR 1.2 million to EUR 2.0 million).
Continuation of tax value of assets by the limited partnership
After obtaining the status of a CIT payer, the limited partnership would carry forward the tax value of its assets, particularly with respect to the basis for fixed assets and intangible assets, the adopted method, rates and period of amortisation, and the amounts of amortisation deductions previously taken against the fixed assets and intangible assets.
Detailed rules for taxation of the sale of all interests in a limited partnership, liquidation of a limited partnership, or exiting a limited partnership established prior to 1 January 2021
Partners of a limited partnership established on or before 31 December 2020 who receive tax income after that date for:
- Paid sale of all interests in the limited partnership
- Contribution of all interests in the limited partnership to another corporate entity as an in-kind contribution
- Exiting the limited partnership, or
- Liquidation of the limited partnership
will be entitled to recognise revenue-earning costs generally corresponding to the costs of acquisition or taking up of participation in those partnerships, taking into account the portion of profits taxed prior to 1 January 2021 but not distributed by that date.
Exemption from CIT for payment of dividend to a limited partner of a limited partnership under the Parent-Subsidiary Directive
The draft act does not exclude the exemption from CIT on a dividend paid to a limited partner or a limited partnership pursuant to the EU’s Parent-Subsidiary Directive. However, adding limited partnerships to Art. 1(3)(1) of the CIT Act will exclude this exemption for dividends paid to a general partner.
Lack of provisions fully equalising CIT taxation of limited partnerships and other CIT payers
The draft amending act does not contain provisions allowing extension to limited partnerships of regulations governing such matters as:
- Exchange of shares
- Tax capital groups
- Corporate mergers.
Joanna Prokurat, tax adviser, Tax practice, Wardyński & Partners