From 1 January 2021, limited partnerships became subject to corporate income tax (CIT). However, the legislator provided for the possibility for companies of postponing the period of being liable to the tax in question until 1 May 2021. Contrary to appearances, making use of this option was related to many practical problems. We will try to resolve it in this publication.
1. How to postpone the date of being subject to CIT?
The legislator didn’t specify the actions which the limited partnership should take to postpone the date of liability to CIT until 1 May 2021. Therefore, this issue has become the subject of considerations by doctrine and practitioners. It’s commonly accepted that, in order to postpone the date of being subject to corporate income tax, it’s necessary for all members of the limited partnership (both general partners and limited partners) to adopt an appropriate resolution and to notify the tax office competent for the company and for each of the partners about the fact of its adoption. A copy of the resolution should be attached to the notification. The actions in questions should have been taken before the end of 2020.
It’s possible to encounter the view that, due to the fact that the actions described above don’t result from legal provisions specifying the rules for postponing the period of being subject to CIT by limited partnerships, their failure to be taken shouldn’t mean that the company can’t effectively defer its CIT liability. However, we suggest that this position should be approached with caution.
2. Two realities
It should be realised that the postponement of the limited partnership’s liability to CIT until 1 May 2021 has the effect that until 30 April 2021 the company wasn’t subject to this tax and to the obligations specified in the Corporate Income Act of 15 February 1992 (i.e. Official Journal of 2020, item 1406, as amended), hereinafter referred to as the Corporate Income Tax Act. Only as from 1 May 2021, the limited partnership has become a CIT taxpayer and the provisions of the Corporate Income Tax Act apply to it. Thus, during one year, the company will be, as it were, in “two realities”, with the date of 1 May 2021 marking the boundaries between them.
3. Closure of the books of account… and what next?
a) Closure of the books of account on the day preceding the acquisition of the CIT taxpayer status
The deferral by a limited partnership of the date of being subject to CIT tax until 1 May 2021 required the closure of the books of account on the day preceding obtaining this status, i.e. on 30 April 2021 (Article 12(3) of the Act of 28 November 2020 amending the Personal Income Tax Act, the Corporate Income Tax Act, the Act on the flat-rate income tax applicable to certain income received by natural persons and certain other acts (OJ 2020, item 2123), hereinafter referred to as the amending act). This obligation raises many practical questions and doubts, in particular: whether financial statements must be prepared twice in 2021, at what date the financial statements must be done, how financial years will develop. The Department of Public Expenditure Efficiency and Accounting of the Ministry of Finance answered it by letter of 30 December 2020, constituting a response to the inquiry made by the President of the National Council of Statutory Auditors. The position presented in this letter was elaborated in agreement with the Income Tax Department.
b) Reply from the Ministry of Finance
The Ministry points out that when a limited partnership obtains the status of a CIT taxpayer on 1 January 2021, the deadline for closing the books of account and the deadline for preparing the financial statements for the financial year 2020 specified in the Accounting Act of 29 September 1994 (i.e. OJ 2021, item 217, as amended), hereinafter referred to as the Accounting Act, coincides with the date of closing of the books of account resulting from Article 12(3) of the amending act.
In order to clarify the doubts arising in connection with the necessity to close the books of account in the event of postponing the obligation to be subject to CIT, the Ministry referred to the Accounting Act. It was pointed out that the provisions of the Act in question specifying the situations when the obligation to prepare financial statements arised didn’t cover the case referred to in Article 12(3) of the amending act, i.e. the closure of the books of account due to the commencement of CIT tax liability by a limited partnership. This means that “the financial year of the limited partnership for 2021 will run from 1 January to 31 December 2021 and the financial statements will be prepared for this period. On the other hand, the closure of the books of account of the limited partnership on the above-mentioned date of 30 April 2021, and then, their opening on 1 May 2021 will take place solely for tax purposes, with no obligation to prepare financial statements as at 30 April 2021.”
The Ministry also referred to Article 12(4) of the amending act. This provision states: If the last day of the financial year of the limited partnership referred to in paragraph 2 falls between 31 December 2020 and 31 March 2021, this company doesn’t have to close its accounts as at that date and may continue the financial year until 31 April 2021. In the opinion of the Ministry, this provision is specific in relation to the general rule expressed in Article 3(1)(9) of the Accounting Act. (The provision in question defines the financial year and determines when to end the financial year if the company is set up during the financial year or if the financial year changes.) This means that if the financial year of a limited partnership is equal to the calendar year, its year will run from 1 January 2020 to 30 April 2021. Consequently, financial statements will have to be prepared for this period. However, the next financial year will cover the period from 1 May 2021 to 31 December 2021.
4. Revenues and costs of a limited partnership which becomes a CIT taxpayer
When determining what is included in the revenues and tax deductible costs of a limited partnership which has become a CIT taxpayer, it’s necessary to be very careful. According to the adopted solution, revenue and costs which constituted revenues or costs of partners aren’t included (Article 12(5) of the amending act).
5. Continuity principle
The provision of Article 12(6) of the amending act explicitly states that the limited partnership continues the valuation of the tax value of the assets made before the date on which it became a taxpayer of corporate income tax, in particular with regard to the initial value of fixed assets and intangible assets, the adopted depreciation method, as well as the amount of depreciation charge previously made on these fixed assets and intangible assets. Moreover, it should also take into account the events occurring before the date of obtaining the CIT taxpayer status which affect the amount of their tax liability.
6. What to do with the partners’ income earned before the date on which the limited partnership became a CIT taxpayer?
In the intertemporal provisions, the legislator also put in order the rules of taxation of the income of members of a limited partnership, obtained before the date on which the company became a CIT taxpayer.
According to Article 13(1) of the amending act: The income of the members of a limited partnership or general partnership obtained from participation in the profits of such a company, achieved by this company before the day on which this partnership became a taxpayer of corporate income tax, is subject to the provisions of the acts amended in Articles 1 and 2, in the version in force before the date on which such a company became a taxpayer of corporate income tax. In other words, the existing regulations apply to the income of partners of a limited partnership obtained from participation in the company’s profits, earned by the company before it became a CIT taxpayer. This means that the payment of profits achieved before the change of the company’s tax status will be fiscally neutral for the partners. They will be taxed according to the existing rules.
In the case of acquisition or subscription of shares in a limited partnership before the date on which this company became a CIT taxpayer, the partner’s revenue from: redemption of shares or withdrawal from the company, disposal for consideration of these shares, their contribution to another company, as an in-kind contribution, or liquidation of the company should be reduced by the expenses for the acquisition or taking up of share in such a company and by the part corresponding to the excess revenue over the costs of obtaining such income, obtained by the partner before the date on which the company became a CIT taxpayer, reduced by payments made for participation in the company and by expenses not constituting tax deductible costs (Article 13(2) of the amending act).
7. CIT in a limited partnership and taxation of partners’ income
It’s impossible not to mention that making limited partnerships liable to corporate income tax has raised many doubts. There were concerns that the change would result in double taxation of the company’s income and partners’ income. However, the legislator provided for mechanisms aimed at mitigating the negative effects for the partners of covering the limited partnership by CIT. The general partner may deduct CIT income tax paid by the company in the part attributable to the partner in accordance with the participation in the profits from the tax on payment of profit. On the other hand, a limited partner may benefit from tax exemption in the amount of 50% of revenue obtained by the limited partner from his/her participation in the company, but not more than PLN 60,000 in a tax year. The exemption applies separately to each limited partnership in which the taxpayer is a limited partner. However, the exemption in question isn’t available to a limited partner who:
- holds, directly or indirectly, at least 5% of shares (stocks) in a company with legal personality or in a capital company in an organization being a general partner in a limited partnership either
- is a board member:
a) of a company with legal personality or a capital company in an organization being a general partner in a limited partnership, either
b) of a company holding, directly or indirectly, at least 5% of shares (stocks) in a company with legal personality or in a capital company in an organization being a general partner in this limited partnership, either
- is an entity related to a board member or a partner of a company that has, directly or indirectly, at least 5% of shares (stocks) in a company with legal personality or in a capital company in an organization being a general partner in this limited partnership (Article 22(4e) and (4f) of the Corporate Income Tax Act; Article 21(1)(51a) and paragraph 40 of the Personal Income Tax of 26 July 1991 (i.e. OJ 2020, item 1426, as amended).
8. Legal notice
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