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Changes in income taxes in 2021 published. Limited partnerships subject to CIT

2020-12-09

On 30 November 2020, the Act of 28 November 2020 amending the Personal Income Tax Act, the Corporate Income Tax Act, the Lump Sum Income Tax Act on Certain Incomes Earned by Natural Persons and Certain Other Acts was published in the Journal of Laws No. 2123.

The most important issue regulated by this law is the inclusion of limited partnerships and some general partnerships in the category of CIT payers. The amendment also contains a number of other issues important for taxpayers, such as limiting the possibility of settling tax losses, increasing the income limit for taxpayers entitled to apply the 9% rate, introducing a definition of a real-estate company and imposing obligations on such companies as well as obliging taxpayers to prepare and publish a tax strategy.

Below we present the summary of the most important changes, which come into effect on January 1, 2021.

  1. Limited partnerships and certain general partnerships as CIT payers 

Pursuant to the amended regulations, limited partnerships will be treated as CIT payers, which means that the income received through them will be taxed twice – once at the partnership level at the rate of  9% or 19% and the other time at the level of partners (as capital gains).

Additionally, general partnerships having among their partners persons other than natural persons, which will not inform the tax authorities about the taxpayers obliged to tax their share their profits, will also be treated as CIT payers.

The Act also provides for the exemption of 50% of a limited partner’s revenue, but not more than PLN 60 000 from the share in the profits of each limited partnership. This preference will apply only to limited partners unrelated to the general partner. In this situation, limited partners in popular limited partnerships whose general partner is a limited company (sp. z o.o.), having limited partners on the management board or as partners, will not be entitled to take advantage of these preferences. The general partners in such limited partnerships, by crediting the tax due from the company, will generally maintain one-time taxation of their share in profits.

Profits earned by limited partnerships before January 1, 2021, which have already been taxed at the partner level in 2020, will not be taxed again if distributed after January 1,  2021.

Losses incurred by partners before January 1, 2021 (or before May 1, 2021, if the limited partnership maintains the existing taxation rules until then) will be deductible only by the partners. If a partner is not able to deduct them from his business income, he will be entitled to deduct them from his share in the profits from the limited partnership in the future.

The regulations enter into force on January 1, 2021, subject to the transitional provisions, which allow limited partnerships to tax their income exclusively at the level of partners according to the existing rules until 30 April 2021. This deferral may be beneficial to some entities, but it should be noted that each situation should be considered individually.

  1. Limitations on the settlement of tax losses

The amendment limits the possibility of settling tax losses if a taxpayer has taken over another entity or acquired an enterprise or an organized part of an enterprise (including as a contribution in kind), as a result of which the objects of the taxpayer’s actual basic business have changed after such takeover or acquisition, in whole or in part, being different from the objects of the basic activity actually conducted by the taxpayer before such takeover or acquisition, or at least 25% of the taxpayer’s shares are held by an entity or entities which, as at the end of the tax year in which the taxpayer suffered the loss, did not have such rights.

The change is aimed at limiting the practices of taxpayers using the tax losses of another entity to reduce their own tax liabilities.

  1. Change of tax depreciation rules for taxpayers benefiting from an exemption

The act limits the possibility of increasing or decreasing the depreciation rates for assets by taxpayers benefiting from the subject-based exemption (e.g. due to conducting business in a special economic zone). The limitation will apply to fixed and intangible assets recording in the company register on or after January 1, 2021. 

  1. Definition of a real-estate company.

Under the new legislation, a real-estate company is an entity, including  non-companies, in which at least 50% of the balance sheet value of the assets, as at the end of the year preceding the fiscal year, consisted of real estate located in the territory of Poland or rights to such real estate, and the balance sheet value of these properties exceeds PLN 10 000 000.

If shares or rights in such a real-estate company are sold and if the seller is a foreign entity, then the real-estate company will act as a tax remitter, i.e. it will be obliged to collect and pay an income tax advance in the amount of 19% into the bank account of a relevant tax office. In case the-real estate company does not have information about the amount of the sale transaction, it makes an advance payment of tax at 19% of the market value of the shares or rights sold. Before the date of advance payment, a foreign taxpayer is obliged to transfer the amount of the advance tax payment to the remitter.

  1. Obligation for foreign real-estate companies to appoint a tax representative

Foreign real-estate companies will be obliged to appoint a tax representative in Poland (similarly to VAT taxpayers from countries other than members of the European Union). The obligation to appoint a tax representative does not apply to Real-estate companies that are subject to income tax in an EU Member State or another country belonging to the European Economic Area on their total income regardless of where it is earned.

The tax representative will be jointly and severally liable with the real-estate company for its tax liabilities. Failure by such a company to appoint a tax representative will be subject to a penalty of up to PLN 1 million.

  1. Tax strategy – public disclosure obligation

Taxpayers whose revenues exceed the equivalent of EUR 50 million and companies belonging to tax capital groups regardless of their revenues, and real estate companies will be obliged to prepare and to publish a so-called ‘tax strategy’ on the websites. The document should include, among other things, a description of the procedures related to the performance of ongoing tax obligations, information on transactions with related entities, planned and implemented restructuration, submitted applications for individual tax rulings and on the taxpayer’s settlements in countries applying harmful tax competition

Such information on the implemented tax strategy prepared by the tax capital group will contain the information indicated above with respect to the tax capital group and each of its member companies.

The failure to comply with the obligation will be subject to a fine of up to PLN 250 000.

  1. Increase in the amount of income entitling to CIT rate of 9%

The amendment raises the limit of revenue entitling one to apply a 9% tax rate (instead of 19%). In the current legal situation, this limit is EUR 1.2 million.

  1. Prolonged exemption from building tax

The amendment includes the extension of the building tax exemption until the end of the month in which the epidemic state is cancelled (if it lasts longer than until the end of 2020). The current regulations provide for such an exemption from building tax for the period from March 1, 2020 to December 31, 2020.

Should you be interested in further information, please contact us to discuss the details of the proposed changes in the tax regulations, which enter into force on January 1, 2021.

 

Marcin Sobieszek, Tax Advisor,  ATA Tax Sp. z o.o.

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