Partnerships and companies - which form of taxation to choose?
Each firm is obliged to settle taxes on the terms provided for a given form of busines activity. Companies having legal personality are CIT payers, while in partnerships the tax is settled by the partners individually, but not in all cases. So, which form of taxation should be chosen?
CIT or PIT?
Business entities make settlements for tax purposes on the terms specified for a given type of the business. Therefore, applying the appropriate form of taxation is of key importance from the perspective of running a business.
Generally, there are two types of companies – civil law partnerships and commercial law companies – and it is this division that constitutes the most important criterion when selecting the appropriate form of taxation.
Civil law partnerships are a group of partnerships without legal personality and are subject to the so-called principle of transparency, which means that the tax is settled individually by the partners, who may choose from among four forms of taxation:
• On general terms, according to the tax scale (tax rate of 17% up to PLN 85 528 and above PLN 85 528 - 32%),
• The linear tax rate (19%),
• The lump-sum tax on registered revenues,
• The fixed amount tax.
The rules of lump-sum taxation in 2021 have changed in favour of the taxpayer. The highest rates of the lump-sum tax on registered revenues have been decreased:
• from 20% to 17% on revenues earned from freelancing,
• from 17% to 15% on revenues earned from provision of some services, e.g., financial and insurance, advertising services,
and the limit of revenues which give one the right to the lump sum has increased from EUR 250,000 to EUR 2 m, while the list of professions eligible for the lump sum has been extended to cover also, inter alia, advocates, notaries, legal advisers, accountants, tax advisers.
In 2021, the lump sum on registered revenues of up to EUR 2 m may be used by:
• natural persons earning revenues from a business activity,
• enterprises in inheritance,
• private partnerships whose sole partners are natural persons,
• private partnerships of natural persons and an enterprise in inheritance,
• registered partnerships whose sole partners are natural persons.
Changing the form of taxation to the lump sum tax requires notifying the head of the tax office, i.e. submitting a statement on selection of lump-sum taxation.
Obviously, selecting some of the above forms is not always possible. These forms differ from one another – for example, applying the tax scale and the linear tax rate means that income is subject to taxation and in the case of the lump-sum tax on registered revenues the object of taxation are revenues.
Registered and limited partnerships as CIT payers
From January 2021 limited partnerships and some registered partnerships have become payers of corporate income tax, despite the fact that, as mentioned above, partnerships which are not legal persons generally are not subject to CIT.
However, 1 January was the effective date of new regulations pursuant to which limited partnerships are obliged to pay CIT in the same way as companies having legal personality, namely at the current CIT rate of 19% or 9% in the case of small taxpayers whose revenues do not exceed EUR 2 m and taxpayers who have just started running their business.
Registered partnerships, on the other hand, are subject to CIT, if they fail to jointly meet the following conditions:
• The shareholders of the registered partnership are natural persons only,
• Before the beginning of the financial year the partnership submits information in accordance with the agreed template regarding details of the natural persons and legal entities having rights to participate in the profit of the partnership,
• The registered partnership will be updating information concerning the rights to the profit within 14 days following the date of a change.
Learn more: Amendments to the CIT and PIT bills
Taxation of commercial law companies, i.e. companies having legal personality, is subject to a completely different principle than in the case of partnerships, namely the principle of separation: the company and its shareholders settle tax separately (the company – CIT and the shareholders – CIT or PIT).
Application of the principle of separation involves the so-called double taxation – the company as a payer of tax is obliged to settle the tax on earned income, and its shareholders, if they gained income from the company in the form of the dividend, also have to pay due tax on that amount.
It is worth to note that a shareholder in a company may be a natural person or a legal entity, thus income earned by them from the company will be subject to PIT (19%) or CIT.
However, there is a possibility of an exemption from CIT on the dividend, if the following four conditions are jointly met:
- The party paying out the dividend and the revenues on account of participation in the profits of legal entities is a company with registered seat or management in the Republic of Poland,
- The party earning revenues from the dividend and other revenues on account of participation in the profits of legal entities with registered seat or management in the Republic of Poland is a company subject to income tax on its entire income in the Republic of Poland or any EU member state other than the Republic of Poland, or any other member state of the European Economic Area, regardless of the place where such income is earned,
- The company which is paid the dividend has directly not less than 10% of the shares (stocks) in the capital of the company paying the dividend,
- The company which is paid the dividend does not use the exemption from income tax on its entire income, regardless of its source.
Also, a foreign company which is a shareholder in another company may use the above exemption from the tax on the dividend, if it will additionally confirm the status of the ultimate beneficial owner, location of the registered seat for tax purposes and will present a certificate of residence.
NOTE! From January 2021 there are new rules with regard to the withholding tax (a value paid annually to one entity exceeding PLN 2 000 000 – tax deduction at the standard rate on the surplus over that amount).
Retaining a part of the profit vs tax
Frequently, a company wishes to retain a part of the generated profit and designate the saved amount for investments. Civil law partnerships may retain the profit in whole or in part increasing the property of the partnership, but not affecting the amount of paid tax in this way.
In companies the part of the profit retained for investment or development purposes will not result in the need for the shareholders to pay tax on company’s income, but the company will still be obliged to settle tax on the entire profit (income), regardless of the value of the retained amount.
Indirect taxes – value-added tax (VAT)
The value-added tax (VAT) applies to all companies reported as VAT payers. Therefore, both a partnership without legal personality and a company is a VAT taxpayer. VAT is charged on all activities of manufacturers, traders or service providers, and in particular all entities using goods or intangibles for commercial purposes.
Tax law distinguishes the so-called small VAT taxpayers who may choose cash accounting in respect of VAT settlements, but only if the value of sold goods and services (including the amount of tax) in the previous fiscal year did not exceed:
• EUR 1 200 000 or
• EUR 45 000 in the case of taxpayers who run a brokerage business, manage investment funds, manage alternative investment funds, are agents, contractors or other persons who provide services of a similar nature, except for consignment.
In other cases VAT taxpayers are obliged to apply the general rules of VAT settlement and the tax obligation arises along with the supply of goods or services, or upon performance of a part of the service for which payment was specified.
Estonian CIT – a new mechanism shifting the moment of emergence of a tax liability
The Estonian CIT, namely the lump-sum tax on income of companies, was introduced in Poland on 1 January 2021. This new tax solution enables taxpayers to shift the moment of emergence of a tax liability, if the company retains the profit and allocates it to investments. CIT will be paid only after the company has paid out the dividend to the stockholders or shareholders, and an additional benefit may be the possibility of deducting a part of CIT paid at the level of the company by its shareholder in the PIT return.
The Estonian CIT is chosen for four years and the request for applying the new form of taxation is filed with the tax office by 1 February. Check here, if your company may use Estonian CIT.
Check also how to save when running a company: Allowances for companies in 2021
Learn more about forms of running a business, see: Comparison of companies: companies and partnerships