Exemption from income tax on profits of general and limited partnerships
On December 15, 2021, the Polish Minister of Finance issued a general interpretation No. DD5.8203.2.2021, in which he confirmed that the exemption from income tax on certain income from participation in the profits of legal persons (e.g. dividends, income from investment funds, the equivalent of the profit of a legal entity and a company used to increase the share capital, etc.), regulated in article 22 paragraph 4 of the Corporate Income Tax Act of 15 February 1992 [PL] (Journal of Laws 2021, item 1800, as amended) may, under certain conditions, be applied to revenue (income) derived from participation in the profits of limited and general partnerships that are CIT taxpayers – generated by these companies from the date on which they became such taxpayers.
Requirements for tax exemption
According to the provisions of the CIT Act, a partner of a general or limited partnership having the status of a CIT taxpayer who does not act as a general partner in the partnership may benefit from an income tax exemption of income from participation in profits specified in the Act if the following conditions are met:
- the entity paying out revenue from a share in the profits of legal persons is a company liable to income tax and having its registered office or management in Poland;
- the entity earning income from a share in the profits of legal persons is a company which:
- is subject to income tax on its total income in Poland or another Member State of the European Union or in another country belonging to the European Economic Area, regardless of the place where such income is earned;
- holds directly not less than 10% of shares in the capital of the company which derived income from participation in profits of legal persons, continuously for two years, including when the period of two years of continuous holding of shares expires after the date of obtaining such income;
- does not use the income tax exemption on all of its income, regardless of its source;
- owns shares from which it has received income by:
- ownership,
- other than ownership, on the condition that the income would have qualified for the exemption if the ownership of the shares had not been transferred.
Two-year shareholding period
Regarding the calculation of the two-year period of holding 10% (or more) of the company’s shares as a condition for benefiting from the exemption when the company paying out revenue from participation in the profits of legal persons is a general or limited partnership holding CIT taxable status, the Minister of Finance stated that in assessing whether this condition is met, the period before the general or limited partnership obtained the status of a CIT taxpayer must also be taken into account, and if the limited partnership was transformed into a general partnership or the general partnership was transformed into a limited partnership – also the period preceding such transformation.
Legal changes introduced in 2021 to which the interpretation applies
As of 1 January 2021, limited partnerships having their registered office or management board in Poland, as well as certain general partnerships, have acquired the status of corporate income taxpayers.
At the same time, the legislator amended certain definitions outlined in the CIT Act. In particular, the Act clarifies that “companies” are also understood as limited partnerships and general partnerships with the status of an income taxpayer.
Other definitions contained in these regulations provide that whenever the CIT Act refers to:
- share – it also means all the rights and obligations of a partner in limited partnerships, limited joint-stock partnerships, and general partnerships which are taxpayers of income tax;
- share capital – this also means share capital of a simple joint-stock company and share capital of limited partnerships, limited joint-stock partnerships and general partnerships, which are taxpayers of income tax;
- participation in profits of legal persons – it also means participation in profits of limited partnerships, limited joint-stock partnerships, and general partnerships being taxpayers of income tax.
Interpretation by the Polish Minister of Finance
Taking into account the definitions mentioned above and relating them to the aforementioned article 22 paragraph 4 of the CIT Act, the Minister of Finance confirmed in his General Interpretation that companies that are CIT payers and which have the right to participate in the profits of a limited partnership or a general partnership that has been granted the status of a CIT payer may use an exemption from income tax on the income derived from participation in the profits of such a company, except for companies acting as a general partner in limited partnerships.
Which income is tax-exempt?
By the general interpretation issued, the exemption under article 22 paragraph 4 of the CIT Act may cover the income of partners derived from participation in the profits of a general and limited partnership having the status of a CIT taxpayer, that is:
- revenue actually received due to profit distributions made by the general and limited partnership to its partners,
- the equivalent of the general or limited partnership’s profit allocated to increasing its share capital,
- the value of undistributed profits in a general and limited partnership and the value of profits transferred to capitals other than the share capital of such a company, in the case of its transformation into a company that is not subject to CIT.
Favorable resolution of doubts
The General Interpretation resolves doubts that have arisen regarding the possibility of applying for the exemption under CIT Act art. 22. par. 4 to income paid to partners by limited partnerships and general partnerships that are taxpayers of income and it should be noted that, which does not happen very often, these doubts have been resolved in favor of taxpayers.
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