On the grounds of the amendment of the Corporate Income Tax Act on 30 November 2020, limited partnerships have been subject to CIT. The form of conducting business according to the rules, when the limited partner was usually a natural person with a significantly limited scope of personal liability and the general partner was a limited liability company (sp. z o. o. sp. k.), whose liability was limited to the amount of equity, has been forgotten.
The changes concerning limited partnerships came into force on 1 January 2021, but the legislator allowed for the voluntary application of the existing regulations until the end of April 2021. Limited partnerships that took advantage of the aforementioned extension became CIT taxpayers on 1 May 2021. This means that they had to close their books as at April 30, 2021. On the other hand, companies whose tax year ended between December 31, 2020 – March 31, 2021 were entitled to extend their tax year until the end of April 2021.
Taxation rules for a limited partnership and its partners from 1 January 2021
In light of the new regulations, the limited partnership has become a CIT taxpayer, which in practice means that it is obliged to settle CIT according to the 19% or 9% scale (in case of small taxpayers with revenues not exceeding EUR 2 million). At the same time, the taxation of the general partner is not significantly increased. Income from participation in the profits of legal persons is subject to a lump-sum income tax at the rate of 19%. In turn, the value of the lump-sum tax is reduced by the tax paid by the company according to its share in the company’s profits.
The income of a limited partner is taxed much less favourably because it is subject to double taxation. First at the level of the partnership and then in the form of a flat-rate income tax of 19%. What is more, the limited partner is not entitled to deduct the tax paid by the partnership. Although the legislator provided for an exemption of up to 50% of the income obtained by a limited partner from participation in the profits of a limited partnership, it is only up to the amount of PLN 60,000 in a given tax year.
The above-mentioned exemption is not applicable if the limited partner:
- holds min. 5% of shares of the general partner;
- is a member of the management board of the general partner or of the company having 5% of shares of the general partner;
- is an entity related to a shareholder or a member of the management board of the partnership which holds at least 5% of shares of the general partner.
Solutions proposed to taxpayers
In order to minimize the negative effects of the amendment of the CIT Act, a number of solutions have been proposed to taxpayers. Taxpayers have two options – lower taxation of the adopted form of business activity and at the same time increase the risk related to personal liability for obligations of the partnership and vice versa. Below are examples of solutions for taxpayers and the associated advantages and disadvantages.
Swapping the roles between limited partner and general partner within a limited partnership
- lower taxation of the individual who is a general partner and can deduct the tax paid by the partnership;
- possibility of applying an exemption from taxation of income from participation in the profits of a limited partnership paid to a legal person who is a limited partner, provided that a legal person holds at least 10% of the limited partnership’s shares for a period of two years.
- unlimited liability for the general partner’s partnership obligations;
- the possibility of applying an exemption from taxation of income from participation in the profits of a limited partnership paid to a limited partner who is a legal person is significantly limited due to the fact that the limit is calculated from the moment the partnership became a CIT taxpayer. Therefore, a planned disposal of shares or a change in the size of shares may make it impossible to take advantage of the exemption.
Conversion of a limited partnership into a general partnership
- possibility to maintain the status of a tax transparent company (without double taxation), but only if the partners are exclusively natural persons or otherwise the CIT-15J information was filed before the registration of the transformation of the company (in case of no change of partners or proportion of their share in profits) or within 14 days from the registration of the transformation of the company (in case of a change of partners or proportion of their share in profits);
- if the above condition is not met, it is possible to apply an exemption from taxation of income from participation in the profits of a general partnership by a partner who is a legal person, with the same limitations as in a limited partnership.
- unlimited liability of the partners for the liabilities of the general partnership.
Conversion of a limited partnership into a limited liability company
- possibility to limit liability of partners to the amount of their contribution to the partnership.
- double taxation of the partnership, with the possibility to take advantage of the exemption from taxation of a dividend paid to a partner who is a legal person.
Conversion of a limited partnership into a joint stock company or a simple joint stock company
- possibility to issue financial instruments, i.e. shares or bonds, and to trade them easily.
- double taxation of the partnership, with the possibility to take advantage of the exemption from taxation of dividends paid to a shareholder who is a legal entity.
Conversion of a limited partnership into a professional partnership
- possibility to maintain status of transformed partnership as tax transparent – only partners of the partnership are subject to personal income tax;
- partners are not liable for professional partnership obligations due to a mistake made by one of them or by a person reported to another partner, while a practising of a freelance profession. The liability of partners for obligations of a the professional partnership is subsidiary.
- a professional partnership can only be established by members of the liberal profession.
Searching for the optimal model
Certainly, each situation should be analysed individually. An ideal model for transforming a limited partnership does not exist. One of the most beneficial solutions is to transform a limited partnership into a professional partnership. However, it must be remembered that this possibility is limited to a narrow group of taxpayers. On the other hand, transformation of a limited partnership into a general partnership, although it makes it possible to maintain the status of a tax transparent company, entails the risk of much higher liability for the company’s obligations. This liability can be minimized by creating a limited liability company, but it is difficult to avoid double taxation in this model. For this reason not all limited partnerships transformed after 1 January 2021 or 1 May 2021. It is also worth mentioning that some companies with the status of a small taxpayer may count on taxation at the rate of 9%, and additionally their partners benefit from the fact that they are not obliged to pay the solidarity levy. Unfortunately, only few taxpayers took advantage of this solution.
Maciej Kozub, VAT specialist, Poznań