One of the most discussed and the most significant amendments to the Polish tax legislation, applicable as of 2021, is the extension of CIT obligations to limited partnerships and certain general partnerships.

The idea dates back to 2013 and finds its origin in works on CIT amendments proposed at that time. Yet, the initial draft being the fruit thereof provided for extending CIT obligations solely to limited joint-stock partnerships, starting from 2014. Eventually, the idea for introduction of limited partnership as CIT payers was abandoned, since, according to the authority, "compared to a limited joint-stock partnership, a limited partnership was a much less frequently chosen vehicle for tax optimization, and a type of business structure frequently selected by small and micro-companies. As a result, defining a scheme under which a limited partnership could be used as a vehicle for tax optimization turned out to be too complex. Thus, considering the market situation in 2013, it was decided to stick to the then-binding regulations on the capacities of limited partnerships in terms of corporate income tax, while granting the CIT payer status to limited joint-stock partnerships”.

It should be noted, however, that the recently passed amendment remains to some extent consistent with the latest government measures aimed at increasing the interest in conducting business activity through capital companies. This is done by means of a 'stick' (extending CIT to limited and general partnerships) and a 'carrot' (e.g. a 9% tax up to a certain turnover cap and the Estonian CIT scheme). In fact, the legislator indicates that the reason behind the proposed changes is the need to combat tax abuses associated with conducting business activity through partnerships.

It is worth emphasizing that in 2013 the number of registered limited partnerships was slightly over 12,000, while at the end of 2019, it spiked to over 40,000. This spectacular increase is due to a number of overlapping circumstances, yet, undoubtedly, full CIT transparency of limited partnerships has been one of the main reasons thereof.
Up to now, income earned by limited partnerships was taxed solely at the level of their partners, who demonstrated revenues and costs on an ongoing basis, in proportion to the share held in the partnership. Importantly, earnings distributed by the partnership were not subject to repeated taxation. Therefore, taxation took place only once, as opposed to companies, where distribution of the earning was subject to CIT at the level of the company and then at the level of partners.

Limited partnerships are formed by two types of partners: general partners, who represent the company and have unlimited liability, and limited partners who are liable for the partnership's obligations only up to the amount of the commandite sum. In practice, it was common to establish structures in which limited liability companies acted as general partners - usually holding a minimum nominal capital and a small part of the rights and obligations, the vast majority of which belonged to limited partners being the actual partners thereof. Such manner of organizing business activity brought a double benefit: first of all, it provided for a single tax imposed solely on partners, secondly, it limited their obligations only up to the amount of the contribution made. Such structures seem now to be targeted by the legislator. Unfortunately, this translates into eradication of all possible tax benefits related to limited partnerships per se.
Pursuant to the amendment, the income paid to the general partner will be taxed with a 19% flat-rate income tax. The general partner can only deduct it by a portion of CIT paid by the partnership (according to their share in the partnership's profit). Thus, for general partners, taxation will effectively remain at the same level.

This does not apply, however, to limited partners who, as a rule, will not be authorized to use the tax deduction scheme, which in practice will translate into double taxation - at the partnership and at the partner level. In this respect, the regulations provide for a certain exemption, yet, due to its significant restrictions, it is not likely to have any far-reaching positive effects for limited partners. This is because the exemption will encompass 50% of the revenue earned by a limited partner through shares in a limited partnership's earnings, however, no more than PLN 60k annually. The limits are set on all share in earnings of each partnership, in which the taxpayer acts as a limited partner. At the same time, the exemption does not apply to a limited partner who, inter alia, holds directly or indirectly at least 5% of shares in a company with legal personality that is a general partner in this limited partnership, is a member of the management board thereof or an associated entity.

In a situation where limited partners are legal persons, subjection of the distributed gains to the exemption which up to now was applied to dividends may be considered. For example, if a company holds at least 10% shares in a limited liability company which pays out dividends and keeps it for at least 2 years, at the same time being the beneficial owner of the payment made, it may be eligible for a full tax exemption on dividend. As a result of changes in the statutory definitions and the purposive interpretation of the provisions of the amending Act, similar exemption could now be applied to the profits of a limited partnership. In fact, taking steps in this direction is worth considering.

Imposition of CIT obligations means that limited partnerships will be required to keep the adopted tax valuation of assets, in particular with regard to the initial value of fixed and intangible assets, the adopted depreciation method, rates and period, as well as the amount depreciation write-offs made so far. The events affecting the amount of the tax liability that occurred before the date on which the partnership became a CIT payer must also be taken into account.

When discussing the introduced amendments one should also keep in mind the interim provisions in force. In principle, the new regulations entered into force on 1 January 2021, yet, the new rules of taxation do not apply to the income earned by partners to a limited partnership before this date. Moreover, the interim provisions also relate to the possibility of deducting losses previously incurred by partners and the rules for calculating the tax result for operations on equity participation purchased or subscribed for before the effective date of the regulations.

At the same time, a limited partnership may decide to apply the amended provisions starting from 1 May 2021, i.e. the effective date of extending CIT obligations to limited partnerships. New regulations bring implications of accounting nature, since a limited partnership becoming a CIT payer is required to close its accounts on the day before gaining the CIT payer status. An exception is the situation when the last day of the financial year falls in the period from 31 December 2020 to 31 March 2021. If such is the case, the limited partnership is not required to close its accounts and may continue the financial year until 30 April 2021. In this way, the legislator wants to support taxpayers, allowing them to avoid the possible double closing of books in a short time - once at the end of a specific financial year, and the second time in connection with obtaining the CIT payer status.

In light of the above, one may state that extending CIT obligations to limited partnerships has far more reaching implications, going beyond taxation of the current income. In fact, the new regulations are to bring new tax implications for transactions between a limited partnership and its partner, e.g. in terms of in-kind contributions, liquidation or withdrawal. This means that taxpayers should carefully analyse transactions within a limited partnership and asset-related operations that they are willing to perform in the nearest future.

It should be also noted that the new regulations provide for extending CIT obligations also to general partnerships, in which general partners are not only natural persons, unless they submit relevant information on taxpayers who are entitled to a share in the partnership's profits or an update of such information within 14 days from the date the change was made. Importantly, unlike limited partnerships, general partnerships have not been granted a possibility of postponing the date of becoming CIT payers until 1 May 2021.

Regardless of the reasons behind the amendments emphasizing their tax system-sealing role, provided by the authority, one should keep in mind that limited and general partnerships are legal forms frequently used by family businesses and entities from the consulting industry, which do not seem to have tax optimization for their primary purpose. Additional taxation may force these entities to undertake specific reorganization measures (e.g. transformation into a general partnership or changing the roles of partners), and therefore fail to contribute to the realization of the income assumed by the State Treasury. A similar situation was witnessed upon imposition of CIT on joint-stock partnerships, reflected in the fact that in 2013 there were 5.7 thousand such entities registered, compared to 3.7 thousand at the end of 2019, (with 28,000 new limited partnerships established in the same period). Therefore, it should be expected that, starting from 2021 limited partnerships are to become far less popular,
with many entities of this type winding up.


Mateusz Rychlik, Assistant Manager, Corporate Tax Advisory, KPMG in Poland
Paweł Szala, Consultant, Corporate Tax Advisory, KPMG in Poland

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