Why bring limited partnerships within CIT?
The idea of subjecting limited partnerships to CIT first arose in 2013. It was abandoned during legislative work, and only partnerships limited by shares were brought within the CIT Act. The main reason was that limited partnerships were less frequently established for so-called tax optimisation. They were then used primarily by family businesses and micro and small enterprises. The explanatory memorandum to the new bill notes that, since the 2013 amendment took effect on 1 January 2014, partnerships limited by shares have no longer been regarded as tax-efficient. According to the bill’s proponents, this led to rapid growth in the number of limited partnerships, where single-level taxation continued to apply. The Ministry of Finance also noted that limited partnerships are treated as CIT taxpayers in many EU countries.
Rationale for the bill
The principal argument advanced for the change is that limited partnerships are allegedly used mainly by ‘large entities’, with limited liability companies as general partners. The provisions aim to close gaps in the tax system and link the tax paid by large businesses, particularly international ones, to where they actually earn their income. The Ministry of Finance also points out that, under current tax law, entities in similar economic circumstances but with different legal forms are treated differently for income tax purposes. A limited partner’s legal position and liability resemble those of a shareholder in a company with share capital, such as a limited liability company. It was therefore considered that there was no rational justification for this difference in taxation.
The public consultation process
Public consultations and coordination within public administration have already taken place. Various organisations, including Konfederacja Lewiatan, the Family Business Initiative Association and law firms, submitted numerous comments, generally critical of subjecting limited partnerships to CIT. They argued, among other things, that the bill would primarily affect micro, small and medium-sized businesses, and criticised the strict conditions for limited partners’ tax exemption. They stressed that the growing popularity of limited partnerships did not stem from a desire for tax optimisation, but from entirely different factors: flexibility in running the business and limited partners’ limited liability for its debts. The Ministry of Development also warned that the change would mainly affect family businesses and suggested considering a postponement of such significant tax reform.
All these critical comments were either rejected or found unfounded. In response, the bill’s proponents emphasised, among other things: ‘The bill provides exemptions and deductions for partners in limited partnerships, both limited and general partners, as a result of which their tax burdens, particularly where they are small taxpayers, will not increase significantly’; and ‘Abandoning the grant of CIT taxpayer status to limited partnerships would lead to continued growth in businesses’ interest in this form of optimisation.’
What will the new taxation model look like?
If the proposed changes take effect, the CIT Act will also apply from 1 January 2021 to limited partnerships with their registered office or management in Poland. This will introduce ‘double taxation’: tax will be paid by the partnership itself and by its limited and general partners on income from their shares in its profits.
What taxes will the partnership and its limited and general partners pay if the bill becomes law?
Taxation of the partnership
Under Article 19 of the CIT Act, a limited partnership will pay tax at 19% or 9%. The 9% rate will be available to taxpayers meeting the following criteria:
- they are starting business or have small taxpayer status, meaning their sales revenue including VAT due in the previous tax year did not exceed the equivalent of EUR 2,000,000;
- their revenue in the tax year does not exceed the equivalent of EUR 1,200,000; if the bill becomes law, this amount will rise to EUR 2,000,000.
Taxation of limited partners
To make the change less burdensome for limited partners in partnerships not chosen solely for tax optimisation, the bill proposes a tax-free amount. The relief will be available to limited partners who are individuals or legal persons. It will be limited to 50% of revenue from the partnership’s profits, up to PLN 60,000 of revenue per tax year from each partnership in which the taxpayer is a limited partner.
Under the bill, however, the following taxpayers will not qualify:
- those holding, directly or indirectly, at least 5% of the shares in a company with legal personality or a company with share capital in formation that is a general partner in that limited partnership;
- management board members of: (a) a company that is a general partner in the limited partnership; or (b) a company directly or indirectly holding at least 5% of the shares in a company with legal personality or a company with share capital in formation that is a general partner in it;
- entities related, within the meaning of Article 23m(1)(4) of the PIT Act or Article 11(1)(4) of the CIT Act, to a management board member or shareholder of a company directly or indirectly holding at least 5% of the shares in a company with legal personality or a company with share capital in formation that is a general partner in the limited partnership.
For limited partners who are individuals, introducing this tax-free amount will impose new duties on the partnership. As withholding agent, it must correctly calculate, collect and remit lump-sum tax on profit distributions paid to limited partners under Article 41(4) of the PIT Act.
Taxation of general partners
General partners may pay lower income tax under Article 22(1a)–(1e) of the CIT Act or Article 30a(6a)–(6e) of the PIT Act, as applicable. The lump-sum tax calculated on income from the limited partnership’s profits is reduced by an amount equal to the general partner’s percentage share of those profits multiplied by the tax due on the partnership’s income, calculated under Article 19 of the CIT Act for the tax year from which that profit-sharing income arose.
Conversion into a registered partnership and the proposed changes
With double taxation planned, some limited partnerships will consider converting into registered partnerships. Before deciding, they should consider the proposed CIT changes for that form too: some registered partnerships will also become CIT taxpayers. Those whose partners are all individuals will remain taxed under the existing rules. CIT taxpayer status will apply only to partnerships where:
– the partners include entities other than individuals; and
– the partnership has not provided the heads of the tax offices responsible for its registered office and its partners with information about taxpayers receiving income from profit participation and the extent of each taxpayer’s entitlement.
Summary
The government is pursuing the bill urgently, with enactment planned by 30 November 2020. Given how its proponents responded to criticism during consultation, the government can be expected to promote it strongly. It must, of course, still pass through the Sejm and Senate and be signed by the President. Nevertheless, all limited partnerships should familiarise themselves with the proposed changes and consider how to prepare.
