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published on 2 December 2020 | reading time approx. 2 minutes
The Polish President signed into law on 29 November 2020 the act introducing CIT taxation of limited partnerships. The amending act was published in the Journal of Laws on 30 November 2020. For partners this means that the tax must be paid twice: first by the limited partnership on its business income and then by the partners on payments they receive from the partnership's profits.
The most important rules for taxation of limited partnerships and their partners are as follows:
As a rule, the provisions will apply to income to be earned by limited partnerships from 1 January 2020. However, taxpayers may decide that the amended provisions will apply to them starting from 1 May 2021. A limited partnership must take this decision by the end of this year. If it decides to do so, it must close the books of account on 30 April 2021 and reopen them on 1 May 2021.
If a limited partnership chooses to join the new taxation regime from 1 May 2021, it will not be obliged to close its books of account as of 31 December 2020. However, such a solution raises a number of doubts in terms of tax and commercial laws. A better option may be to close the books of account as of the end of the fiscal year falling on 31 December 2020 (or any last day of the financial year falling between 31 December 2020 and 31 March 2021) and to close them again as of 30 April. Please note that closing the books of account implies the obligation to prepare the financial statements.
Only limited partnerships established or having its management board in Poland are subject to CIT. Foreign limited partnerships which are flow-through entities in their country of establishment and which operate in Poland through a permanent establishment or branch office entered in the National Court Register, will not be deemed CIT taxpayers.
The reduced CIT rate is 9 per cent if the partnership's annual income does not exceed 2 million euros. 19 per cent CIT will apply in all other cases.
General partners will be taxed only upon the distribution of profits by the limited partnership. As a rule, distributed profits will be taxed at the rate of 19 per cent. However, general partners will be allowed to reduce the income tax payable on the profit by deducting the portion of CIT paid by the limited partnership (in proportion to the general partner's share in the limited partnership’s profit). This means that the tax burden of general partners will remain unchanged, unless the limited partnership pays 9 per cent CIT – then the general partner will actually pay 10 per cent tax.
Limited partners too will be taxed only upon profit distribution. The provisions provide for an exemption of 50 per cent of the revenues earned by the limited partner but not more than PLN 60,000 of such revenues per year from each of the limited partnerships in which he holds shares. The proposed conditions for using the tax exemption are designed in a way that makes it practically negligible. This is because limited partners may not be associated with a general partner, whether through equity or personal links. Most of limited partnerships are associated through links specified by law. As a result, dividends paid by a limited partnership to a limited partner will in principle be subject to taxation.
According to the transitional provisions, the payment of profits generated by limited partnerships before 1 January 2021 should be accounted for based on the currently applicable rules: only partners pay the tax. In practice, this means that the partnership paying profit to a partner for e.g. 2020 will not deduct income tax because the tax was already paid by the partner during the year in the form of monthly tax advances and will be ultimately cleared in the annual tax return for 2020. The same applies to all profits carried forward.
Losses incurred by the partners before the entry into force of the new CIT taxation rules for limited partnerships may be deducted only by the partners. If a partner has no such an option because he does not earn revenues from the current source (the so-called other sources, i.e. operating/business activity), he may offset such losses against the profits received from the limited partnership (income from sharing in profits of legal persons).
The limited partnership measures its assets for tax purposes just like before. This refers both to the initial value of tangible and intangible assets, adopted depreciation/amortisation method, depreciation/amortisation rates, depreciation/amortisation period and the amount of previously made depreciation/amortisation charges. The measurement also takes into account the events which occurred before the partnership was classified as CIT taxpayer and which affect the amount of its tax liability.
Since the new provisions will seriously affect the business activity performed in the form of a limited partnership, it is worth considering a change of the model of your business activity. If you want to learn more about the effects of this change and the available options, please do not hesitate to contact us.
Renata Kabas-Komorniczak
Managing Partner
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