Transformation of a limited joint-stock partnership into other partnership may be subject to tax
Following amendment of the Corporate Income Tax Act, as of 1 January 2014 a limited joint-stock partnership (SKA) became a taxpayer liable to corporate income tax (CIT). For that reason many entities may consider in future whether not to change the legal form of conducted activities, e.g. by transforming SKA into other partnership whose income is subject to tax only at partner level. However, such transformation may not be neutral from tax perspective. Tax effects of such transformation depend on whether SKA has undistributed profits carried forward and profits transferred to other than share capitals as well as whether and to what extent (if any) it distributed profits to its partners in the past.
According to legal provisions effective as of 1 January 2014, the value of undistributed profits of a limited joint-stock partnership as at the date of its transformation into other partnership is subject to tax in accordance with the same rules as in the case of taxation of dividend paid out (in the part attributable to shareholders who are natural persons, the lump sum tax is in principle 19%).
Those provisions should be applied with regard taken of interim provisions, which regulate, among others, how to treat, as at the date of SKA transformation into other partnership, undistributed profit of SKA generated at the time when it was not treated as a taxpayer liable to CIT. Pursuant to interim provisions, as at the date of transformation, tax is not chargeable on undistributed profits of SKA carried forward and profits recognised under other than share capitals, generated before the date on which SKA became a taxpayer liable to CIT, in the part attributable to a general partner’s share in the profit. However, tax is chargeable on the profit of SKA generated before the date on which SKA became a taxpayer liable to CIT, in the part attributable to shareholders’ share in the profit. The literal wording of the interim provisions allows the shareholder to deduct from income so determined on the date of transformation expenses for the acquisition of shares in SKA and, if applicable, any surplus of income over tax deductible costs taxed at the shareholder’s level before the date of transformation.
The interim provisions were implemented in order to tax income of SKA generated at the time when SKA was not treated as a taxpayer liable to CIT, in the part attributable to shareholders, which income was not taxed at all if no dividends were paid out. The legislator decided that SKA will be required, as a withholding agent, to collect tax on income generated at the time when SKA was not treated as a taxpayer liable to CIT, as at the date of transformation. Thus, when planning restructuring which involves transformation of SKA into other partnership one should take into account that such operation may be connected with tax burdens equal to tax due on undistributed profit or profit recognised under capitals of such partnership before the date on which the partnership became a taxpayer liable to corporate income tax (in the part attributable to shareholders).
A separate issue is taxation of undistributed profits generated by SKA after the date on which SKA became a taxpayer liable to CIT. Transformation of SKA into other partnership may also involve the necessity to tax income (revenue) earned after that date by partners. The rules and manner of taxation of such income depend on the partner’s status. If the shareholder is a natural person, the rate of lump sum tax is 19%. If the shareholder is e.g. a capital company, income on the date of transformation may be exempt from tax according to the rules set forth in Article 22.4 of the CIT Act (among others, if the condition of holding no less than 10% of shares for minimum 2 years is met). For the general partner the rate of tax is also 19%, however, the tax calculated at that rate is reduced by the amount corresponding to the general partner’s percentage share in the profit multiplied by the tax due on income of the partnership. By implementing that mechanism of tax crediting, the income of SKA in the part attributable to the general partner will be taxed effectively only once (which was the case before amendment of the provisions including SKA under the category of taxpayers liable to CIT).
As an addition it should be emphasised that SKAs whose tax year differs from a calendar year retain the right to apply the new provisions on the inclusion of SKAs under the category of taxpayers liable to CIT starting as of the first tax year of SKAs commencing after the effective date of the provisions pursuant to which SKAs became taxpayers liable to CIT (i.e. after 1 January 2014). Therefore, SKA whose tax year e.g. commenced on 1 December 2013 and ends on 30 November 2014 became a taxpayer liable to CIT only beginning as of 1 December 2014.