The subject of taxation of a limited partnership and its partners is the subject of many publications. This applies primarily to payments from the company to general partners and limited partners. The latter topic has even become the subject of the general interpretation of the Minister of Finance of 17 December 2021, file reference number DD5.8203.2.2021).
The question is, what if a limited partnership was the owner of shares in a limited liability company or a joint-stock company? Could it then take advantage of the so-called participation exemption (Article 22 sec. 4 et seq. of the Polish CIT Act)?
According to the author, this is generally possible.
At the outset, let us recall the definition of a “company” from the Polish CIT Act.
Pursuant to Article 4a point 21 of the Polish CIT Act, whenever a company is mentioned, it means:
- a company with legal personality, including a company established on the basis of Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European Company (SE). EC L 294, 10.11.2001, p. 1, as amended. d.; OJ EU Special Edition, Chap. 6, Vol. 4, p. 251);
- a capital company in the organization;
- companies referred to in Article 1 sec. 3 point 1 and 1a (e.g. limited partnership – emphasis added), having their registered office or management board in the territory of the Republic of Poland;
- an unincorporated company with its registered office or management in another country, if it is treated as a legal person under the tax law of that other country and is taxed in that country on all its income, regardless of where it is earned.
Pursuant to Article 22 sec. of the Polish CIT Act, income from participation in the profits of legal persons – including dividends – is exempt from income tax if the following conditions are met:
- the dividend payer is a company having its registered office or management board in the territory of the Republic of Poland;
- the recipient of income (income) from dividends is a company subject to income tax on all of its income in the Republic of Poland or in a Member State of the European Union other than the Republic of Poland or in another country belonging to the European Economic Area, regardless of the place where it is earned. Author’s note: as indicated above, a limited partnership is a “company” within the meaning of the Polish CIT Act;
- the company referred to in point (b) directly holds not less than 10% of shares in the capital of the company referred to in point (a);
- The company referred to in point (b) does not benefit from the exemption from income tax on all of its income, regardless of the source of its income.
Pursuant to Article 22 sec. 4a of the Polish CIT Act, this exemption applies if the company receiving income (revenue) from dividends (in this case, a limited partnership) holds shares in the company paying these receivables (e.g. a limited liability company) continuously for a period of two years.
However, it is possible to apply the exemption even if the two-year period has not yet expired (Article 22 sec. 4b of the Polish CIT Act).
If, in such a situation, the shares are sold before the end of two years, the tax must be paid with interest on the tax arrears.
Pursuant to Article 22 sec. 4d point 1 of the Polish CIT Act, the exemption applies if the ownership of shares in a subsidiary results from ownership (we understand that this condition is met).
It is worth noting that the advance tax ruling issued by the Director of the National Tax Information of 17 September 2021 (file reference number 0111-KDIB1-1.4010.163.2021.1.BS) states that a limited joint-stock partnership cannot benefit from this exemption if there is a general partnership between it and the limited liability company. Hence, it can be inferred that the authority approved the exemption for the direct ownership of the shares of the limited liability company by this entity.
On the other hand, for a limited partnership, there are no taxation options available under the (Polish) holding company regime. Pursuant to Article 24m sec. 1 point 2 of the Polish CIT Act, a holding company (under the taxation regime of a holding company) can only be: a limited liability company, a joint-stock company or a simple joint-stock company.
