When can a general partner deduct limited partnership tax (CIT) from PIT?
From 1 January 2021 Polish limited partnerships are obliged to settle CIT. For owners of such companies it means double settlement of income tax: first they will pay CIT of the company, and then PIT on settling their own income.
Despite the fact that for general partners the legislator provided an appropriate tax relief – it does not cover advances on account of profit.
According to the individual interpretation of 19 April 2021, No. 0115-KDIT1.4011.61.2021.1.MR – “payment of profit advances in a limited partnership results in PIT income. On the other hand, the general partner’s deduction can be applied only when the value of corporate income tax for the entire tax year is known.”
Read more about taxation of limited partnerships:
- New taxation rules for limited partnerships in Poland
- Important tax changes, including: Corporate Income Tax (CIT) for limited partnerships, introduction of the so-called Estonian CIT – from 1st January 2021
Advances on account of profit in a limited partnership are taxed
The payment of profit advances in a limited partnership gives rise to income on PIT. On the other hand, the general partner’s deduction may be applied only when the amount of corporate income tax for the entire tax year is known¹.
The future event
The applicant is a general partner in a limited partnership that conducts business activity in the field of providing legal services. The partners are exclusively natural persons. The limited partnership became a CIT taxpayer on May 1, 2021.
All partners of the partnership are entitled to their share in the profits of the partnership. During the fiscal year, the partnership paid and intends to pay monthly advances to the partners for their share of the profit for the fiscal year. Advances towards profit sharing are paid after the end of a given calendar month and after the profit generated by the company in a given month is determined. The entire share of the partners in the company’s profit will be settled after the end of a given fiscal year.
The applicant asked whether the general partner’s deduction could be applied when calculating the tax on the profit advances. This is because the general partner may deduct from tax the amount of CIT due on the limited partnership’s income attributable to the general partner.
Decision of the competent authority
The authority reminded that pursuant to Art. 24(5) of the PIT Act, income (revenue) from participation in the profits of legal persons is the income (revenue) actually generated from such participation. The legislator did not list among the examples of income (revenue) from a share in the profits of legal persons the payment of advances on dividends or advances on profits, but the payment of such amounts to a shareholder of the company is treated as the actual obtaining of revenue from a share in the profits of such company. Payment of such advance results in generation of income referred to in Art. 17 section 1 point 4 of the PIT Act.
A literal interpretation of Art. 30a Section 6a of the PIT Act, which indicates that a general partner is entitled to a tax reduction by the amount of tax paid by the limited partnership, leads, in the authority’s view, to the conclusion that the amount of the tax reduction can be determined only when the value of the CIT due on the income of the limited partnership for the tax year in which the profit distributed to the partners was earned is known.
In view of the above, the authority concluded that it is impossible to apply the reduction to advances paid to partners in the course of the tax year on account of their share in the profits for that year.
Finally, the tax authority confirmed that, pursuant to Art. 30a Section 6a of the PIT Act, the right to reduce the flat-rate income tax payable in respect of income from a share in the profits of a legal person for the entire tax year may be exercised by the applicant for a declaration of an overpayment of the flat-rate income tax and for the return of such overpayment to the applicant by the competent tax office.
¹Individual interpretation of 19 April 2021, No. 0115-KDIT1.4011.61.2021.1.MR
Source: The article was created in collaboration with our cooperation partner TaxaGroup.
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