As of January 1, 2021, limited partnerships are to be subject to corporate income tax. This is according to a government bill [1] submitted to the Sejm on September 30, 2020. According to the bill, all limited partnerships will be subject to corporate income tax, regardless of the type and scope of their business or ownership structure. Recall that currently, double taxation applies to capital companies, i.e., limited liability companies and joint-stock companies, as well as limited joint-stock partnerships. Currently, in the case of a limited partnership, tax is payable only once, on the income from the business attributable to each partner.
For limited partnerships and their partners, the amendment in question means additional tax burdens due to the fact that, in addition to the obligation to pay income tax, it will also be necessary to pay tax on distributed profits (in a similar way to dividend tax).
As for the issue of taxation of distributed profits, this is to depend on the status of the limited partnership partner.
In the case of a general partner , who, in accordance with commercial law, is liable for the partnership's obligations with all of his or her assets, the profit will be taxed at a 19% rate. He or she will have the right to reduce the flat-rate income tax on distributed profits by a portion of the income tax paid by the partnership. In the case of a limited partner , who is liable only up to the limited partnership sum, his or her profit will also be taxed at a flat-rate income tax of 19%. However, the limited partner will not be able to deduct the income tax paid by the partnership, meaning that his or her profits will be subject to double taxation.
The bill provides limited partners with the option to benefit from a preference that exempts 50% of the limited partner's income from double taxation, up to PLN 60,000.00 annually, provided they meet certain conditions, including no ties to a partner or management board member of the general partner. In practice, this may mean that few limited partners will qualify for this tax preference.
What could be the solutions?
Entrepreneurs affected by these changes may consider several tax-beneficial legal solutions. These include converting a limited partnership into a general partnership or establishing a general partnership to transfer part of their business. As the January 1, 2021 deadline approaches, we recommend taking appropriate steps to analyze possible solutions.
How can we help?
Our lawyers and tax advisors can help you with the following:
- Audit of the business activity in terms of the possibility of applying tax-advantaged solutions,
- Development of possible variants and solutions for a limited partnership,
- Carrying out the process of changes in legal and tax aspects, in particular in the scope of transformation or establishment of a company,
- Legal and tax support at every stage of implementing the selected variant.
[1] Draft Act amending the Personal Income Tax Act, the Corporate Income Tax Act, the Act on Lump-Sum Income Tax on Certain Incomes Earned by Individuals, and certain other acts. The draft was published on the Government Legislation Center website under item 642. Version dated September 30, 2020.
