The report looks at how limited partnerships are taxed in 16 European countries. LPs in the majority of the countries are tax transparent, meaning that they are not liable to CIT. These include Austria, Denmark, Finland, Ireland, Malta, Germany, Sweden and the UK.
In all the other countries, LPs have to pay taxes within historically conditioned legal frameworks. Importantly, none of the countries covered by the report has imposed a tax on LPs in the last five years. This indicates that the taxing of LPs in any of the countries has little to do with the step-up in efforts in recent years to counter tax avoidance.
In the case of limited partnerships in France and the Czech Republic, where LPs have to pay CIT, the general partner's income is not taxed at the company level. Poland, however, is gearing up to impose such taxation. None of the countries in the report has different rules for taxing partners depending on the relationships between them, e.g. the fact that an LP's limited partners hold shares in the company that is the LP's general partner.
If Poland introduces double taxation for limited partnerships, the situation of the country's small family-run businesses will be significantly worse than that of limited partnerships in Germany (for annual incomes not exceeding PLN 230,000). Even though Polish LPs may apply a preference rate of 9%, the tax rates for the Polish partners will be higher compared to those applicable by German partners, despite progressive rates in Germany.
At least 13 thousand limited partnerships in Poland will be affected by the proposed change.
Due to the EU and international laws, the new CIT rules in Poland will not adversely affect the competitiveness of Poland-based LPs with capital held by foreign entities. The current tax rate of 19% will continue to apply to them. In response, Polish LPs will probably convert to alternative legal forms of business. Some will become registered partnerships (Polish: spółka jawna) or LLPs. By doing so, they will have to sacrifice their and their families' sense of security to continue paying taxes at the current rate and to stay competitive. Others, mostly large entities, will use limited liability companies based on holding structures to carry on their activities. The state budget’s extra revenue will be minimal, as Polish LPs will convert to other legal forms to stay competitive on the market.
In 2010-2019, Poland saw the number of new companies and partnerships grow at a rapid pace. The largest group of the newly established entities were limited liability companies (176.7 thousand), which accounted for 83% of all companies and partnerships in Poland in 2019. The number of such companies stands at 429.1 thousand, compared to 40.6 thousand limited partnerships, which account for only 7% of all companies in Poland. Germany's figure is 15%, which is double the percentage for Poland. Although the number of limited partnerships has increased significantly in recent years, if only for the reason that LPs help reduce business risks, Poland lags far behind its western neighbour.
"We can see other alternative solutions that could help reduce the risk of limited partnerships transferring untaxed income outside Poland. For example, limited partnerships could become tax remitters. In such a case, an LP with partners based outside Poland would, as a tax remitter, pay tax on its income to Polish tax authorities. This alternative solution would protect Polish entrepreneurs from paying more tax and, at the same time, help them stay competitive in relation to its foreign counterparts," Mateusz Stańczyk, a partner at CRIDO's tax advice team commented.
"The fact that limited partnerships are not used for international tax optimisation was shown already by a report released in early October. That was later confirmed by what the Ministry of Finance stated in reply to a request for public information made by the Union of Entrepreneurs and Employers (ZPP). The most recent report confirms also the fact that limited partnerships in Europe are generally tax transparent entities. If LPs have to pay CIT in some countries, it is because the legal frameworks in those countries are historically conditioned rather than designed to plug state budget leakage. It turns out that the arguments put forward by the Ministry of Finance in support of the proposed changes are not reflected in the reality. The decision to impose CIT on limited partnerships will only make things worse for Polish businesses, as the tax burden for them will be greater than that for their counterparts in other countries," says Jakub Bińskowski, Head of ZPP's Department for Law and Legislation.
"The proposed tax changes are a big concern for [Polish] limited partnerships. We have seen a downturn in the economy now and the costs they are incurring to step up their safety measures and to access new communication technologies are growing. We will be waiting for their opinions in our survey by the end of this month. The response so far is significant. We received the first answers as soon as 10 minutes after we sent out our questions," says Jerzy Wonka, Head of Development at InfoCredit.