The process of transforming a company—whether a sole proprietorship or a partnership—into a limited liability company brings a number of tangible benefits, primarily limiting personal liability for obligations and optimizing the business structure. However, amidst the maze of formalities and image benefits, entrepreneurs often lose sight of a fundamental tax issue: the treatment of profits generated before the transformation. An ill-considered disbursement of these funds after the notarial procedure and the National Court Register have been completed can lead to re-taxation, completely unjustified.
This problem most often affects entities created through the transformation of sole proprietorships (Sole Proprietorships) and civil partnerships, general partnerships, and professional partnerships. The capital generated by these enterprises in the period preceding the change in legal form was already subject to personal income tax at the level of the owners. However, upon transformation, it becomes the assets of a new legal entity, a limited liability company. Legal succession means that these funds are physically held in the accounts of the new entity, but their transfer to the partners' private portfolios after the restructuring begins to raise serious concerns from the tax authorities, who would be happy to see additional taxable income in this process. Limited partnerships also face a similar challenge with respect to profits generated before they obtained corporate income tax status.
Security Architecture Before Transforming a Sole Proprietorship
The greatest room for maneuver and the highest level of tax security can be achieved by taking appropriate measures during the transformation planning phase. In the case of a sole proprietorship, the best strategy is to withdraw funds intended for the owner's personal purposes before the transformation is entered in the National Court Register.
Corrective actions after finalizing the JDG transformation
Many entrepreneurs only realize the scale of the problem after the fact, when the limited liability company is already in operation and its opening balance sheet shows profits from previous years. The crucial question then arises: will the lack of prior preparation irrevocably condemn the owner to double taxation when attempting to withdraw this money?.
In such a situation, the defense strategy must be based on well-established, favorable administrative court case law. The main line of argument boils down to demonstrating that these funds constitute the taxpayer's private assets, from which the tax has already been duly paid. The greatest challenge, however, is defending the legal basis for such a payment from a capital company.
The specificity of transformations of partnerships and civil partnerships
In the case of civil partnerships, general partnerships, and professional partnerships, the general principle remains the same: the distribution of profits earned before the transformation should, by its very nature, be tax-neutral. Since partners have already paid income tax on their share of the profits of a tax-transparent partnership, re-demanding the tax by the state violates fundamental principles of social justice.
Leaving unpaid profits does not deprive one of the right to capital. The rational approach is to initiate the procedure for an individual tax ruling, followed by a consistent fight in the administrative courts. Property rights and the prohibition of double taxation of the same funds are values that courts have repeatedly placed above the formalistic approach of tax authorities, offering a realistic chance of full victory and the safe disbursement of accumulated funds.
An example of a favorable ruling is the judgment of the Supreme Administrative Court of 14 March 2024, file reference II FSK 808/21. In this judgment, the court emphasized that tax succession under Article 93a of the Tax Ordinance does not "transform" the nature of income – the fact that a corporation assumes the tax rights and obligations of its predecessor does not mean that profits generated by the partnership automatically become the profits of the legal entity. The concept of "share in profits of legal entities" applies only to profits generated by the legal entity, not funds originating before the change of legal form.
It follows from the above that in order to avoid re-taxation of “old” profits, three conditions must be met:
- separation in the books – the balance sheet of a capital company should clearly show which funds originate from before the transformation and which were created after it;
- prior taxation – it must be demonstrated that the profits from before the transformation were taxed by the partners as income attributed in proportion to the share in the profit of the partnership or as income from business activities;
- resolution on payment – it is worth explicitly stating in the content of the resolution that the subject of payment is the profit generated before the transformation (specifying the financial years and amounts), separated in equity.
This article is for informational purposes only and does not constitute legal advice.
The law is current as of June 12, 2026.
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