The introduction of CIT for limited partnerships means that, from this year onwards, in addition to the tax paid by partners on distributed profits, the company will have to pay 19%/9% corporate income tax. Therefore, the change introduced by the Ministry of Finance is referred to as double taxation of limited partnerships when viewed from the perspective of their owners.
The Ministry of Finance holds the view that limited partnerships are used for aggressive international tax optimisation, while limited partnerships with a general partner of a limited liability company violate the tax avoidance clause.
Since 1 May 2021 at the latest, all limited partnerships have become payers of corporate income tax. In practice, a limited partnership has been made tax equal to a limited liability company. From this moment on, "small" limited partnerships will be subject to effective taxation at the level of 27% (PIT + CIT), and "large" limited partnerships to taxation above 34% (PIT + CIT). Due to the changes introduced, a large number of small and medium-sized business owners, often family businesses, are trying to find out whether there are any alternatives in this new legal environment.
The legislation provides for certain forms of mitigating the adverse effects of introducing taxation for limited partnerships. The general partners may make a tax deduction proportionate to the CIT paid by the limited partnership. On the other hand, limited partners may deduct part of their income, but no more than PLN 60 000.
Conversion of a limited partnership into a general partnership
Limited partnerships may make several changes, for example they may decide to convert to a general partnership. However, it should be remembered that the existing regulations provide that the taxation under the current system may be applied only to simple general partnerships, i.e. those whose owners are only natural persons. This means that in practice, if the general partner in a limited partnership was a limited liability company or another capital company, then after transformation into a general partnership, it will no longer be able to perform this function.
Conversion of a limited partnership into a limited liability company
Another solution is the conversion of a limited partnership into a limited liability company. In this case, it may benefit, for example, from the so-called Estonian CIT, which allows for postponing taxation of the company's income until the moment when profits are distributed to its partners. Moreover, this solution makes it possible to lower the effective tax rate on profits.
Establishment of a general partnership
Some entities decide to simultaneously establish a general partnership. From one hand, it is a very simple solution, but on the other hand, there is a certain risk to be taken into account. There is the risk that this structure may be challenged by tax offices.
There is also the option of continuing business activities under the existing legal form, i.e. as a limited partnership. Admittedly, limited partnerships are taxed with CIT, however, there are also various reliefs available, such as the R&D relief or exemptions within the Polish Investment Zone (PSI).
The fact that limited partnerships have been subject to CIT is a significant change which will certainly not be without impact on small, medium-sized and family businesses. The good news is that limited partnerships are not without a way out. It may not be possible to completely eliminate the negative effects of the so-called double taxation, but by taking the right approach there is a chance to alleviate the tax burden.
For entities operating in the form of limited partnerships, we offer the opportunity to analyse potential scenarios for mitigating the impact of the new legislation and to recommend which path may be the most advantageous in terms of industry, scope of activity and company size. Within the framework of cooperation, we offer support in the following areas:
Our cooperation will result in a report summarising the identified opportunities and benefits together with an indication of practical ways to implement them and recommendations as to how to apply optimal tax solutions in the future.
See also: Webinar: Tax strategy and key changes in CIT in 2021
Contact our expert