On October 28, 2020, the government passed changes to tax laws. One of the changes introduced, starting from 2021, is double taxation of limited partnerships. This is not good news for entrepreneurs conducting business in this form. What does double taxation entail and how can it be avoided?
How will double taxation look like?
So far, in limited partnerships, only personal income tax (PIT) has been applicable, of course, only to the income of partners. After the changes, limited partnerships will also have to pay corporate income tax (CIT). This will occur under the same rules as in a limited liability company, joint-stock company, or limited joint-stock partnership. The standard rate will therefore be 19%, and for companies earning less than 2 million euros annually, 9%. The planned changes may come into effect as early as January 1, 2021.
Ways to avoid double taxation
The increase in taxes is certainly not welcomed by entrepreneurs. Due to the necessity of paying an additional tax, both companies and partners’ incomes will be significantly lower. It’s no wonder that ways to bypass these changes and avoid paying taxes are being sought. Firstly, double taxation can be avoided by transforming a limited partnership into a general partnership. However, there are also other methods such as transformations and divisions of companies. It should be noted, however, that there is increasingly less time available for transforming limited partnerships.
Transformation of a limited partnership into a general partnership
Indeed, tax changes also affect general partnerships. They will also be required to pay CIT tax, but only some of them. The obligation to pay CIT tax will apply to general partnerships in which at least one partner is a legal entity, not just individuals, and if the partnership does not inform the tax office of this before the end of the financial year. This opens the way for limited partnerships to avoid CIT tax because they can transform into general partnerships, which will not be required to pay this tax. The transformation procedure is not very complicated. The Commercial Companies Code requires the preparation of a transformation plan for the partnership, adoption of a resolution on transformation, appointment of the organs of the transformed partnership or determination of the partners who will manage the affairs of the partnership and represent it, as well as registration of the new partnership and deletion from the register of the partnership being transformed. The transformation plan should be prepared in writing under penalty of nullity.
Other possibilities to avoid CIT tax
Other transformations of the limited partnership are also possible to avoid the additional tax. For example, it is possible to transform the limited partnership into a limited liability company (LLC), and then divide it into smaller companies, or simply divide the limited partnership itself into smaller companies. However, it should be remembered that dividing into smaller companies will only allow for a reduction of the CIT tax to 9% when their income does not exceed the threshold. Therefore, this is a proposal only for large limited partnerships that will be required to pay the full 19% CIT tax on revenues exceeding 2 million euros.