Distribution of profit in a limited partnership
Many companies will soon need to approve their financial statement for 2023 and distribute the profit or cover the financial loss. They can allocate the profit generated by the entity fully or partially for the dividend payment to partners. What will be the tax outcomes of the payment from the profit made in a limited partnership subject to standard CIT? What are the available tax preferences that can be applied in the case of the limited partner and the general partner in a limited partnership? The above-mentioned issues will be discussed further in this article.
Partners of a limited partnership who receive in 2024 a payment of profit of such a company for the previous year shall receive revenue on share in profits of legal persons, whereby in the case of partners being:
- subject to PIT – it is revenue from money capitals,
- subject to CIT – it is revenue from capital profit.
The said revenue is generated upon the payment of profit and, as a rule, is subject to taxation with a flat-rate income tax of 19%, taking several tax preferences into consideration.
Payment of profit to a limited partner
A limited partner is a partner the liability of which towards the creditors for the company’s obligations is limited. The profit paid to such a partner can be subject to exemption.
The tax-free amount constitutes 50% of the revenue generated by the limited partner due to the share in profits in the limited partnership that has a registered office or the management board seated within the territory of Poland; not higher, however, than PLN 60,000 in a fiscal year. Such provisions have been provided for in Art. 21 section 1 point 51a of the Act of PIT and in Art. 22 section 42 of the Act on CIT.
The said exemption will not apply in case of a limited partner that:
1) directly or indirectly holds at least 5% of shares (stocks) in a company with legal personality or a limited company in an organization being the general partner in the limited partnership in question, or
2) is a member of the management board:
- of a company with legal personality or a limited company in an organization being the general partner in the limited partnership in question, or
- a company that directly or indirectly holds at least 5% of shares (stocks) in a company with legal personality or a limited company in an organization being the general partner in the limited partnership in question, or
3) is an associated entity within the meaning of Art. 23m section 1 point 4 associated with a member of the management board or partner of a company that directly or indirectly holds at least 5% of shares (stocks) in an organization being the general partner in the limited partnership in question.
The limited partner that is a CIT payer can also use another exemption that has been provided for in Art. 22 section 4 of the Act on CIT. The following conditions must be met in such a situation:
- the entity that pays the dividend and other revenue on share in profits of legal person is a company that has the registered office or the management board seated within the territory of Poland,
- the entity which acquires income (revenue) on dividend and other revenue on share in profits of the above-mentioned legal persons is a company that is subject to taxation with income tax in Poland or an EU Member State other than Poland, or another country that belongs to the European Economic Area, on the entire amount of its income, regardless of the place where the income was gained,
- the company which receives the a/m payment holds directly at least 10% of shares (stocks) in the capital of the company making the payment,
- the company which receives the payment does not exercise the exemption from taxation with income tax on the entire amount of its income, regardless of the place where the income was gained.
Payment of profit to a general partner
A general partner is a partner the liability of which towards the creditors for the company’s obligations is unlimited. The payment of profit to such partner is not subject to exemption from PIT or CIT. It is possible, however, to utilize a tax preference in the case of which:
- the flat-rate tax on revenue generated by the general partner due to share in profits of the limited partnership is reduced by the amount equal to the product of the percentage of the general partner’s share in the profits of that company and the tax payable on the income of that company, calculated for the fiscal year for which the revenue on share in profits was obtained,
- the amount of the a/m reduction must not exceed the amount of the calculated flat-rate tax.
This is provided for in Art. 30a sections 6a and 6b of the Act on PIT and Art. 22 sections 1a and 1b of the Act on CIT.
If the general partner obtains revenue under the right to share in profits in several limited partnerships, the reduction mentioned above shall apply separately for each of those companies.
There is a problem in the case of the advance payment towards future profit. Tax authorities believe that it is impossible to apply the a/m preferences during the year since the amount of CIT in a limited partnership remains unknown. On the other hand, the opinion of administrative courts is more favorable to the taxpayer since in the courts’ opinion, the advance payment does not result in an obligation for the company to deduct a flat-rate tax.
Obligations of a limited partnership
In relation to the payment of profit to the partners, the limited partnership becomes a payer and is obligated to deduct a flat-rate tax (of course, taking into consideration any tax exemptions and preferences). Next, the company must pay the tax to the account of the competent tax office. The said obligations must be fulfilled by:
- the 20th day of the month following the month in which the tax was deducted – in the case of a payment in favor of a partner being a natural person,
- by the 7th day of the month following the month in which the tax was deducted – in the case of a payment in favor of a partner being a CIT taxpayer.
A limited partnership is also obligated to submit:
- a PIT 8AR declaration by the end of January of the next year, in which the company discloses the deducted flat-rate tax to partners being natural persons
- CIT 7 information by the 7th day of the month following the month in which the tax was deducted to a partner being a CIT taxpayer
- a CIT 6R statement by the end of the first month of the year following the fiscal year in which the tax payment obligation arose.
Example
There are two partners in a limited partnership: a natural person (the limited partner) and a limited liability company (the general partner). The partners are entitled to shares of 50%. The company paid CIT in the amount of PLN 150,000. The (net) balance sheet profit was PLN 1 million which was fully allocated to payments in favor of the partners (a sum of PLN 500,000 to each partner)
Settlement of the limited partner
- the amount exempt from tax amounted PLN 60,000 (50% out of PLN 500,000 = PLN 250,000, the limit is PLN 60,000)
- amount of tax (PLN 500,000 – PLN 60,000) x 19% = PLN 83,600
Settlement of the general partner
- amount of CIT of a limited partnership that is attributed to the general partner is PLN 150,000 x 50% = PLN 75,000
- flat-rate tax on profit is 19% of PLN 500,000 = PLN 95,000
- amount of payable tax is PLN 20,000 (PLN 95,000 – PLN 75,000)
Author: Agnieszka Bojar – Manager at the MDDP Outsourcing office in Warsaw
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