Limited partnerships, is single taxation possible after the 2021 changes.

Recently we have often received inquiries on how it is possible to maintain single taxation in connection with the introduced CIT taxation of limited partnerships.

The limited partnership is one of the more popular forms of doing business for both smaller companies and large business such as developers.

Until the end of 2020, and in case of extension also until May 2021, partners in such legal structure paid only personal or corporate income tax. For individuals, it could be paid according to a flat rate (19%) or according to a tax scale (17% and 32%). Partnership income was taxed only at the partner level.

With the arrival of the new year the rules of taxation of limited partnerships have changed.

From 1 January 2021 all limited partnerships in our country have become CIT taxpayers. As a result, partners of a limited partnership are subject to CIT at the level of the partnership itself, and later on to CIT or PIT at the level of the partners themselves. Usually the general partner was a limited liability company (spółka z o.o.) which was liable for the company's liabilities and derived a small profit from the company, while the limited partner liable up to the limited partnership amount was a natural person who had the majority of rights from the company's profit.

Is it necessary to transform the company into e.g. a general partnership? Is it necessary to annex contracts with contractors due to the change of the legal form of the company?

Answer:

It is possible to maintain the current form of the limited partnership while being taxed at 19% at the partnership level without having to pay additional tax at the partner level and thus without having to inform our contractors of changes that would involve a change in the legal form of the partnership.

In such a situation the key question is whether the taxpayer-individual, so far being a limited partner and deriving most of the profits from the partnership, in comparison with a limited liability company being a general partner, agrees to increase his liability and change his role from a limited partner to a general partner.

Intra-company changes from existing general partner to limited partner:

If an existing limited partner: a natural person would become a general partner then, according to the wording of current corporate or personal income tax regulations, general partners can reduce the amount of tax by the value corresponding to the quotient of the limited partnership's profit shares and the tax due on its income.

This means that the partnership would be obliged to pay CIT. On the other hand, at the level of a natural person partner who changed his role in the partnership to that of a general partner, he would be able to take advantage of an exemption from income generated by the partnership. Thus, single taxation would be maintained only at the level of the company, and not at the level of the partner, as it was the case so far.

The exemption of the general partner from income tax results from Article 30a Section 6a-6e of the Personal Income Tax Act PIT or Article and was already applied to limited partners of joint stock companies.

Such a change is also acceptable for the Ministry and is not a circumvention of the law, because as we read in the explanatory memorandum to the amendment to the law, it is crucial for the Ministry that only entities which are fully responsible for the business are taxed once.

Therefore both changes in the legal form and changes within the limited partnership with regard to the roles of partners are permissible.

 The situation of a limited partner after changes inside the partnership

In the case of a change of roles of an existing limited partner to a general partner, in order for the limited partnership to operate it is necessary to introduce a new person as a limited partner, even with a small share in profits.  In such a situation, however, an additional person, preferably unrelated to the limited partners and being an entrepreneur, would have to be found. 

Since 2021, limited partners can count on a partial tax exemption of income. In some cases it is possible for as much as 50% of the income, but it cannot be higher than PLN 60 thousand, as it is stated in Article 21 par. 1 point 51a of the PIT Act. However, this exemption is subject to limitations pursuant to Art. 21 sec. 40 of the PIT Act. These limitations, as a rule, boil down to the necessity of maintaining the lack of connections between the new limited partner and the existing general partners.

What is important, without changing the legal form and still conducting business as a limited partnership, it is possible to benefit from the so-called "small CIT 9%". Due to the fact that in 2021 limited partnerships were included in most regulations concerning taxation of capital companies. For example, with annual revenue not exceeding EUR 2 000 000, they will be able to apply a reduced tax rate of 9% of CIT.

It is also worth pointing out that the legislator, in Article 13(1) of the amending act, introduces a regulation that the hitherto income obtained before the day on which the limited partnership became a CIT taxpayer (January 2021 or, in the case of extension, May 2021, respectively) is taxed on the hitherto principles, i.e. only on the level of the partner and not of the partnership.

Legal and tax support:

We are experienced in making changes within a limited partnership to take advantage of the existing tax exemption at the partner level. This allows for preserving the form of the existing business, keeping the name of the company and not having to annex long-established cooperation agreements with business partners, as well as not having to make changes to e.g. loan and lease agreements, permits, concessions and administrative decisions, while maintaining single taxation of the company's income.