Statement of a partner from a partnership – tax effects

According to Article 24(3c) Act on 26 July 1991 on personal income tax 1 ((c) income from the withdrawal of a shareholder from a company which is not a legal person in the event of receipt of cash is the difference between the income on that basis determined in accordance with Article 14 that regulation and expenditure on the acquisition or inclusion of shares in such a company.

The essence of the following interpretation of individual tax law 2 there is a question of how the costs of obtaining income by the applicant should be determined in the event of receipt of remuneration for the withdrawal from the limited partnership.

The company was created by the transformation of the limited-stock company, and the contributions of the applicant to the limited-stock company corresponded to the value of its share in the assets of the limited-stock company.

1. Introduction

The applicant of the interpretation was a limited partnership in a limited partnership whose income is taxed in Poland.

This company was established 28 October 2015 as a result of the conversion, according to Article 551 and next Act of 15 September 2000 Commercial Companies Code 3 (hereinafter: k.s.h.) is a limited partnership based in Poland where the applicant was a shareholder.

The shareholders' contributions to the limited partnership were the same as the shareholders' shares in the limited partnership (applicants in the amount of 18,994,296 PLN), as reflected in the plan for recasting and the statutory auditor's opinion from the audit of the plan.

Importantly, the transformation of the limited partnership took place before the end of its financial year and was not a corporation tax taxpayer.

The applicant intends to withdraw from the limited partnership in the form of termination of the partnership agreement (then it will be removed as its partner), receiving a fixed monetary remuneration. Therefore, in his request for interpretation, he asked whether, according to Article 24(3c) U.p.d.o.f. the expenditure to cover shares in the limited partnership will be the value of the contribution of the applicant specified in the partnership agreement? In his view, the fiscal response should be yes.

2. Expenditure on the acquisition of shares in a non-legal person

In its statement of reasons, the applicant referred to the case law, arguing that when the limited partnership withdraws, its expenditure on the inclusion of shares should be fixed for the time when the contribution to that company is made.

Thus this expenditure is the contribution to the limited partnership and its value corresponds to the share in the limited partnership.

The applicant cited an excerpt from the NSA judgment from 8 August 2018 4 , in which it stated that ‘The actual expenditure on the acquisition or acquisition of shares in the company is therefore the value by which the shareholder’s assets have been reduced in exchange for the shares in the company.

This figure shows the value of the object of the contribution on the day of its contribution, which translates into the amount of the acquired (covered) shares in the company.’ He also referred to the decision of the WSA in Łódź with 14 December 2017 5 , Noting that the court pointed out that ‘in this case, the property of a person entering a company (in the case at hand, a limited partnership as successor to a public company) has been depleted by the value spent to acquire the right to a partnership (a limited partnership).

This value was valued and, according to this valuation (not the actual expenses incurred for the acquisition of the item) at the time of the transfer, the shareholder acquired shares in the limited partnership.’

According to the applicant, the expenses for the acquisition of shares in a limited partnership should be fixed for the moment when he takes up shares in a limited partnership, including in respect of a passenger company which was created by the conversion, as evidenced by the NSA judgment of 5 July 2019 6 .

He also stated that according to Article 553(1) „the converted company has all the rights and obligations of the converted company. This article expresses the principle of continuity, which is to assume that the company converted is identical to the company converted.’

3. Settlement of the capital share of the partner

The Director of National Tax Information found the applicant’s position to be incorrect in interpretation.

He stated, in reference to Article 93a(2)(1) point (a) Act on 29 August 1997 - Tax Ordinance 7 , that the transformation of a limited partnership into a limited partnership is not treated as liquidation of this first companies and the creation of a new entity, and only as a process aimed at changing the legal form of non-agricultural business.

According to Article 65(1) k.s.h. in the presence of a shareholder from the company, the value of his capital share or heir shall be determined on a separate balance sheet, taking into account the sale value of the company's assets.

Consequently, the shareholder’s withdrawal from the company is the obligation to settle his capital participation.

Director KIS recalled that according to Article 14(2)(16) U.p.d.o.f.

the income from the business activity is the cash received by a shareholder of a company which is not a legal person for the purpose of arising from such a company, and Article 14(3)(11) that law provides that to the revenue specified under Article 14(1) and 2 the cash received by a shareholder of a company which is not a legal person in respect of the occurrence of such a company, in the part corresponding to the excess revenue obtained before the shareholder had incurred over the cost of obtaining them (...) minus payments made in respect of the participation in that company and expenses not constituting revenue costs.

Therefore, the measures resulting from this occurrence, corresponding to the excess cash over the above-mentioned value, are an economic activity revenue.

In the opinion of the Director of KIS, expenditure on the acquisition or inclusion of participation in a company which is not a legal person shall be physically spent on the provision of that right.

At the same time, he pointed out the tax neutrality of the transformation of the limited partnership into a limited partnership: “At the time of the conversion, the partners make no contributions and the valuation of the assets (including the contributions of the shareholders) in the conversion plan is intended solely to determine the capital of the converted company and the amount of the total rights and obligations of the shareholders in that company.

Such a balance sheet value shall not constitute an expenditure on the acquisition/purchase of a share in that company.

These expenditures are historical expenditure incurred in acquiring/obtaining the right to participate in a converted company.’ In its interpretation, the Director of KIS concluded that it could not be agreed with the applicant that the expenditure for the inclusion of shares in a limited partnership would be the value of the applicant’s contribution as defined in the partnership agreement, since according to Article 24(3c)) These expenses will be expenditure actually incurred for the acquisition or inclusion of the right to participate in a limited partnership.

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1 i.e. Journal of Laws of 2019, item 1387 as amended

2 Individual interpretation of the Director of National Tax Information from 31 March 2020, reference no. 0115-KDIT3.4011.72.2020.1.PS.

3 i.e. Journal of Laws of 2019, item 505.

4 reference no. II FSK 2276/16.

5 reference no. I SA/Łed 903/17.

6 reference no. II FSK 2956/17.

7 i.e. Journal of Laws of 2019, item 900.