The last stand of single taxation is about to fall – a revolutionary change looms over limited partnerships, which are to become subject to CIT as of next year. There are also prospects of some positive changes – e.g. in flat-rate tax on registered income. What exactly is the government planning with regard to the taxation of our income?
Summary:
- What changes in CIT, PIT and flat-rate income taxation the government wants to introduce as of 01 January 2021.
- What tax considerations make limited partnerships attractive as a legal form of doing business in Poland.
- The rules of taxation on limited partnerships vs. companies.
- What arguments are put forward by the government to justify why amendments to income tax regulations are necessary, and what experts think about it.
The minister of finance kept repeating like a mantra that there will be no new taxes. He forgot to add, however, that the existing CIT provisions might be extended to include approx. 40,000 Polish business entities. The relevant legislative draft (no. UD 126) authored by the ministry of finance was published on 04 September 2020 in the Public Information Bulletin, without much publicity. It reveals the government’s plans for significant changes with regard to the taxation of income – not only CIT, but also PIT and flat-rate tax. Not all the changes are equally controversial, and some are beneficial to taxpayers. Read more details below.
Key changes in CIT, PIT and flat-rate tax for 2021
The most crucial change arising from the information published by the government is that CIT is to be levied on:
- limited partnerships having their registered office or board of directors in the Republic of Poland
- and general partnerships, “where income tax payers participating in the profits of such general partnerships are not disclosed”.
Limited partnerships are the preferred choice of partnership in Poland. According to the latest data of Poland’s Central Statistical Office GUS, at the end of 2019 there were more than 40,000 limited partnerships nationwide. What makes limited partnerships so popular is the fact that at present they are
“the only legal form which ensures the security of private assets, and is at the same time tax-effective for partners distributing a significant portion of profits” – as explained in Puls Biznesu by Grzegorz Szysz, tax advisor and partner at Grant Thornton.
What else is the government planning? Some of the changes planned for 2021 include:
- solutions to facilitate the collection of tax liabilities on income from the sale of shares in real estate companies by non-residents,
- the obligation to prepare and publish tax policies, which is to apply to certain entities subject to corporate income tax,
- changes in transfer pricing provisions.
Among the positive changes for taxpayers, it seems that the government will live up to its promise to increase the limit of gross sales revenue for small taxpayers, from EUR 1.2 million to EUR 2 million. In practice, this means that more taxpayers will be eligible for the preferential CIT rate amounting to 9%. For more information on changes in flat-rate tax click here.
Ważny fragment
An itemized list of planned changes in CIT, PIT and flat-rate tax can be found in the government assumptions for the draft legislation on income taxes. For now, no draft amendment has been published, and there has been no information about the detailed provisions which will in practice determine the consequences of the announced changes for businesses.
CIT for limited partnerships – comments by: Filip Charkiewicz, manager at Grant Thornton
One clear advantage of doing business as a limited partnership is the approach to the taxation of its profits. With income generated by incorporated businesses (companies), which are also quite popular in this country, income tax is first levied when the company files its tax return as a corporate body, and then again when the company decides to pay out profits to shareholders in the form of dividends. Limited partnerships, which are not taxable entities in terms of corporate income tax, are not obliged to pay income tax on the profits they generate, the way joint-stock companies or limited liability companies are – in this case only the individual partners settle their tax liabilities with the tax office. However, the lawmakers are planning to change this, proposing that limited partnerships, which have in a sense been privileged to date, should be recognized as taxable entities in terms of corporate income tax, and as a result become subject to the same tax regime as the incorporated businesses mentioned above.
Taking into account the current situation, largely affected by the pandemic announced by the government in mid-March, this is hardly an opportune moment for introducing such radical changes. There are reasonable grounds to presume that they are dictated not so much by the desire to close loopholes in the tax system, as by the government’s search for new sources of tax revenues to prop up the state budget. The way these changes are communicated to those affected is also quite questionable. The business community has probably never been treated like this… The proposal may not have been introduced through the back door, but probably no-one expected that such a fundamentally revolutionary idea will be put back on the agenda – and definitely not during a pandemic. Following this announcement from the government, many businesses may have to revise their already adopted business plans and tax structures. The assistance of Grant Thornton tax advisors will certainly be indispensable in this regard.
Government rationale for changes in CIT, PIT and flat-rate tax
According to the government, the planned changes in the taxation of limited partnerships constitute a “response to the taxpayers’ optimization structures using the limited partnership format, whereby the limited partnership will become subject to entity-level income tax”. Moreover, as we read in the statement of purpose for the draft, the changes are intended to close loopholes in the system
“of corporate income tax and personal income tax, to make sure that the amounts of tax paid by large enterprises, particularly international entities, are linked to the actual place their income is generated”.
While it is hard to find a good time for tightening the fiscal screw on taxpayers, the fact that it is happening now (with the second wave of the pandemic looming on the horizon) is incomprehensible to many experts, to say the least. Especially considering that over the past few years, tax authorities have been provided with tools against aggressive tax optimization, notably the GAAR clause of 2016. All that is left to do now for the business community is to wait for details of the planned amendment, of which we will keep you updated.
AUTHOR: Honorata Zakrzewska-Krzyś, Outsourcing
