October 2020

CIT on Limited Partnerships’ Profits: A Way to Curb International Tax Optimisation or a Crushing Blow to Polish Taxpayers?

Polish Parliament is currently working on changes to tax law imposing a 19% corporate income tax on limited partnerships. The changes, which will enter into force in 2021, are meant to tighten up the tax system and curb international tax optimisation. Unfortunately, even a cursory glance at the current ownership structure of limited partnerships in Poland will tell us that the proposed solutions will be felt mostly acutely by Polish entrepreneurs.

The lawmakers have attempted to cushion the blow by increasing the income threshold for businesses subject to a 9% CIT rate up to EUR 2 m and proposing a partial tax exemption on the limited partner’s dividend. However, the impact of such an exemption will be negligible, as – more often than not – it will not apply to businesses with Polish capital.

Consequently, the effective tax rate on the income of limited partnerships will amount to approximately 26% (or 19% with the lower CIT rate), 34%, or even 38% in the case of solidarity tax payers.

Interestingly enough, the issue of double taxation is much less likely to affect limited partnerships owned by partners based elsewhere in the EU or EEA. Specifically, upon meeting certain criteria, they will be able to invoke the so-called Parent-Subsidiary Directive, causing their profits to be exempt from CIT.

Considering that limited partnerships with domestic partners account for over 90% of all such entities in Poland, the proposed solution is sure to backfire: it will increase the fiscal burden on domestic entrepreneurs relative to foreign investors, making the former less competitive.

The blink-and-you’ll-miss-it open debate on the issue coupled with the absence of an appropriate delay before the changes take effect does not seem conducive to passing good laws and maintaining a stable and predictable legal order, especially when proposed changes are of this magnitude.

Taking into account the direction and pace of legislative changes, it would be worthwhile to consider their impact on our current business model.


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