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The Polish tax system assumes tax transparency of partnerships. Therefore, till the end of 2013 partnerships limited by shares were subject to the PIT Act. The PIT was paid by partners of such partnerships. However, given the considerable doubts over the determination at what point the PLBS's shareholder earned revenue, the doubts being used by the taxpayers to avoid tax, the legislator decided to move PLBSs to the jurisdiction of the CIT Act. Below we are presenting selected issues related to taxation of PLBSs on new terms. 

Taxation of income

As a consequence of making the PLBSs taxable persons under the CIT Act, the income earned by such partnerships became taxable at two levels – like in all other entities taxable with CIT, that is, limited liability companies and joint-stock companies. Members of the PLBS, both shareholders and general partners, are taxed on the actual income they receive from participation in the partnership's profit. However, the general partner has the right to deduct the tax on profit paid by the PLBS on its own income in the part in which the tax paid by the PLBS reduced, in the economic sense, the partnership's profit paid out to the general partner. The amount of reduction cannot, however, exceed the tax amount calculated for the general partner. The payer (the partnership limited by shares) is obliged to make deductions from the profit payments to such a partner.

Example 1:

The financial year of Alfa spółka z ograniczoną odpowiedzialnością S.K.A. corresponds to the calendar year. The partnership has two partners: general partner – Alfa Sp. z o.o. (right to 95% of the profit) and shareholder – Beta Sp. z o.o. (right to 5% of the profit). The partnership earned in 2014 a profit (equal to taxable income) in the amount of 1000. The taxation is as follows:

1000 x 19% = 190 (tax at partnership's level)

1000 – 190 = 810 (profit for distribution among the partners)
Income of the shareholder: 810 x 5% = 41

Tax: 41 x 19% = 8
Income of the general partner: 810 x 95% = 770

Tax: 770 x 19% = 146

190 x 95% = 181 (maximum deductible amount)

146 – 146 = 0
The assessment of the tax-deductible amount will be difficult if the PLBS derives tax-free income from abroad or income from a business activity in a special economic zone, and therefore taxed differently.

The general partner may enjoy the deduction also when he achieves revenues from participation in the PLBS in a given tax year in a year other than the year following a given tax year, however not longer than over 5 following tax years.

Example 2:

In the same situation as in example 1, the profit for 2014 in the amount of 800 is retained in the partnership. 

The general partner retains the right to deduct the tax paid on the profit for this year, provided the profit is paid till 2019. 

Point at which profit is earned

CIT regulations in their wording effective as from 1 January 2014 do not apply to the profit of partnership limited by shares earned before the date on which the partnership became a CIT taxable person, except for its profit attributable to the shareholder.

Example 3:

The financial year of Alfa spółka z ograniczoną odpowiedzialnością S.K.A. corresponds to the calendar year. The partnership becomes CIT taxable person on 1 January 2014. In 2013 the partnership earned profit which was allocated for distribution among the partners according to the resolution adopted already in 2014. 

Such profit of general partners will be taxed in accordance with the rules applicable till the end of 2013 (income tax advance) and profit of shareholders – in accordance with the rules applicable as from 1 January 2014 (tax of 19% withheld on the date of payment). 

Tax exemption on dividends

1 January 2014 saw the amendment of the wording of Article 22(4) of the CIT Act referring to the tax exemption of income (revenue) from dividends and other revenues from sharing in profits of legal persons. Tax exempt is income earned by shareholders from their participation in a partnership limited by shares established in Poland. However, the exemption does not apply to the general partners' income earned from participation in such a partnership.

Moreover, the tax exemption regulated in Article 22(4) of the CIT Act applies only to dividends and other income from participation in profits of legal persons paid by a partnership limited by shares established in Poland from the profit earned after the date on which that partnership became CIT payer.

Example 4:

The financial year of Alfa spółka z ograniczoną odpowiedzialnością S.K.A. corresponds to the calendar year. The partnership becomes CIT taxable person on 1 January 2014. The shareholder of the partnership, holding 10% of shares (uninterruptedly for a two-year period) is Beta GmbH having its registered office in Germany. This company is not exempt from income tax on all its income. 

The profit earned by PLBS in 2013 and payable to Beta GmbH is not exempt from income tax under Article 22(4) of the CIT Act. Only the profit earned in 2014 and paid out to Beta GmbH will be exempt from tax (assuming that requirements mentioned in Article 22(4) are met and that a certificate of residence is submitted). The profit earned by the general partner will not be exempt from the withholding tax.

If, before 1 January 2014, the partnership limited by shares retained profits from the period preceding this date and the partnership makes payment of dividend or other revenues from the participation in profits of legal persons after the date preceding the date on which it became a CIT taxable person then, for the purpose of the exemption under Article 22(4) of the CIT Act, the profit earned before the date on which it became a CIT taxable person is deemed to be paid in the first place. 

Example 5:

In the same situation as in example 4 the profit earned by the partnership in 2013 was retained, which means that in 2014 shareholders do not receive payments from profits for 2013. This profit will be paid in 2015. 

The shareholder cannot use the exemption of a dividend from the withholding tax since it comes from the profit earned in 2013. The general partner does not pay the tax since his profit has been taxed already in 2013.

Withholding Tax (Tax at Source)

Partnerships limited by shares are not exempt from the withholding tax, as provided for in Article 21(3) of the CIT Act. The Article implements Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States (Official Journal L 157, 26/06/2003, page 49 as amended) which, according to Article 3(a) applies only to entities listed in the Annex thereto. Entities other than those mentioned in Annex to the Directive (here: partnership limited by shares) will have to wait for the exemption under Article 21(3) of the CIT Act until this Annex is amended.

Example 6:

The shareholder of Alfa spółka z ograniczoną odpowiedzialnością S.K.A. is Beta GmbH established in Germany which holds 25% of shares in the capital of PLBS (uninterruptedly for a two-year period). The shareholder granted a loan to PLBS on which interest is paid. The shareholder is not exempt from income tax on all its income. 

The payer (PLBS) will withhold the withholding tax on the payment of interest to Beta GmbH. 

Regulations entered into force as from 1 January 2014 govern as well such tax issues as in-kind contributions to be made to PLBS, liquidation of PLBS and a shareholder leaving PLBS, tax valuation of assets, transformation and mergers involving a PLBS, thin capitalisation. 

We would be glad to share more information on this subject with you and provide comprehensive tax advice on CIT, PIT, VAT in Poland.