Limited partnerships in Europe and CIT

• In most of the analyzed countries in Europe, limited partnerships (or of a similar nature) are tax transparent companies.
• Taxation of limited partnerships in other European countries is not related to the intensified fight against tax avoidance in recent years.
• Most rationally operating companies will change the form of business activity into a form ensuring the current level of taxation, and foreign companies will pay as much as before.
• The state budget will gain little, and Polish entrepreneurs who are busy struggling to survive in the times of the pandemic will lose

- it follows from the report by CRIDO, ZPP and InfoCredit "Taxation of limited partnerships in Europe".

The authors of the report looked at the taxation of limited partnerships in 16 European countries. In most of the analyzed countries, limited partnerships are tax transparent (CIT-free). They include: Austria, Denmark, Finland, Ireland, Malta, Germany, Sweden and Great Britain.

In other countries, CIT taxation of a limited partnership results from the historically adopted legal system. Importantly, none of the analyzed countries has introduced taxation of limited partnerships in the last 5 years. This proves that in none of these countries the taxation of limited partnerships is related to the intensified fight against tax avoidance in recent years.

Among the limited partnerships subject to taxation, in France and the Czech Republic, the income per general partner is still not subject to taxation at the level of the limited partnership (as opposed to the Polish amendment). There are no differences in the taxation of partners in any of the analyzed countries due to the degree of connections between them (i.e. limited partnerships holding shares in a general partner).

Polish, small, family businesses will pay more than their counterparts in Germany

In the situation of introducing double taxation of limited partnerships in Poland, as compared to the conditions of the functioning of limited partnerships in Germany, the situation of Polish small family companies with annual income not exceeding PLN 230,000 will significantly deteriorate. Despite the use of the preferential 9% CIT rate by Polish SPK, the level of taxation of Polish partners will be higher than the analogous taxation of partners of German limited partnerships, despite their progressive taxation.

This situation will affect at least 13 thousand. limited partnerships in Poland.

The state budget will gain little

Due to EU regulations and international law, CIT taxation of limited partnerships will not threaten the competitive position of this type of companies with foreign capital in Poland. They will continue to pay the tax at the same level (ie 19%). On the other hand, Polish entrepreneurs, wishing to maintain their competitive position, will choose an alternative form of running a business. Some of them will transform into a general partnership or partnership. Thus, they will be forced to sacrifice their and their families' safety in order to maintain the current level of taxation and competitiveness. Others (mainly larger entities) will operate through a limited liability company. based on holding structures. Consequently, the effect on the state budget will be minimal, because by protecting their competitive position, Polish companies will save themselves by changing the structure.

The structure of companies in Poland and Germany

In 2010-2019, the number of new companies in Poland grew rapidly. The largest number (176.7 thousand) was established by sp.z o.o., which in 2019 accounted for 83% of all companies in Poland. There are as many as 429.1 thousand. compared to 40.6 thous. limited partnerships, which constitute only 7% of all companies in Poland. In Germany, this percentage is more than twice as high as 15%. Therefore, despite a significant increase in limited partnerships in recent years, if only due to the reduction of business risk for entrepreneurs, we remain far behind our western neighbor in this respect.

- We see other alternative solutions that could help to achieve the goal of reducing the risk of tax-free transfer of the income of limited partnerships abroad, e.g. by imposing payer obligations on the limited partnership. In such a situation, a limited partnership having foreign partners - acting as a payer - would be obliged to pay tax on the limited partnership's income to the Polish office. Such an alternative scenario would protect Polish entrepreneurs against an increase in taxation while maintaining their competitive position in relation to foreign entities - comments Mateusz Stańczyk, partner in the tax advisory team at CRIDO.

- The report published in early October has already proven that limited partnerships are not used for the purposes of international tax optimization. Later this was also confirmed by the response of the Ministry of Finance to the request for public information issued by the Union of Polish Entrepreneurs in this matter. The latest report additionally indicates that limited partnerships are generally rather tax transparent in Europe. The reverse regulations, i.e. those covering CIT limited partnerships, are the result of a historically adopted approach rather than intensified efforts to seal the system. It turns out, therefore, that the argumentation used by the Ministry of Finance in the justification to the draft act is not supported in reality. The only effect of taxation of CIT limited partnerships will be the deterioration of the competitive position of Polish entrepreneurs, who will be burdened to a greater degree than their foreign counterparts - says Jakub Bińkowski, director of the Law and Legislation Department of the Union of Polish Entrepreneurs.

- Entrepreneurs operating in the form of limited partnerships are strongly concerned about tax changes. All the more so as the economic situation has weakened and their costs, related to, for example, switching to a safe mode of work and investments in new communication technologies, are growing. Until the end of this month, we are collecting their opinions in the form of a survey. The response is considerable. The first answers started coming to us 10 minutes after sending the questions - says Jerzy Wonka, InfoCredit Development Director.

About the report

The report refers to entities that qualify as limited partnerships or are comparable to them (i.e. partnerships with partners with different economic liability status, general partners and limited partners. Regulations in 17 countries were analyzed, including 16 European ones (Austria , Belgium, Croatia, Czech Republic, Denmark, Finland, France, Greece, the Netherlands, Ireland, Malta, Germany, Romania, Sweden, Hungary, UK) and Israel The joint report was prepared on the basis of information obtained from the Taxand network and the InfoCredit database and publicly available data, including the Central Statistical Office.

The analysis is a continuation of the first report on the taxation of limited partnerships prepared by Crido in cooperation with InfoCredit and ZPP.

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