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The Warsaw Voice » Law » March 29, 2012
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A new tax haven in Poland?
March 29, 2012   
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Such optimistic opinions appeared in the Polish press after a key resolution of the Supreme Administrative Court issued on Jan. 16, 2012 (ref. No II FPS 1/11). The resolution concerned the taxation of income of shareholders in limited joint-stock partnerships (“LJSP”).

Hybrid partnership
The LJSP is a unique legal construction combining elements of a general partnership and a joint-stock company. Due to its character, LJSP is called a “hybrid” partnership. It has two classes of partners: general partners—“active” partners bearing unlimited liability and responsible for conducting the partnership’s affairs and representing the partnership; and shareholders—“passive” partners whose role and liability is limited to the capital or other assets contributed into LJSP.

When corporate regulations…
Problems with the taxation of LJSP shareholders result from their unique status. From a corporate perspective, their status is similar to the status of shareholders in a joint-stock company. Shareholders can be anonymous for the LJSC (the law allows bearer shares in an LJSC). Shares in an LJSP can be easily transferred and are considered as securities that can be listed on the stock exchange (unlike participation rights in other types of partnership). The profits of an LJSP are distributed to its shareholders through a dividend (while in the case of a general partnership distribution can be made on an ongoing basis).

…do not suit tax solutions
On the other hand, from the literal wording of income tax regulations, LJSP shareholders are treated along the same lines as other groups of partners in a partnership. According to these regulations, partnerships are income tax transparent entities and the income derived by the partnership is directly and proportionally ascribed to its partners as their business profits. As a result, during the year, partners are obliged to calculate and pay income tax advances on the income derived from the partnership.

In the case of LJSP shareholders, there are many practical problems with applying that income tax settlement mechanism. For example, the substratum of LJSP shareholders may be liquid and anonymous for the LJSP (e.g. anonymous bearer shares in LJSP can be transferred many times within a single month). This brings serious problems with ascribing income to a particular shareholder, and with estimating the level of their income. In addition, in practice shareholders do not obtain the profits of LJSP on an ongoing basis during the year, but through a dividend (which may be paid annually or not paid at all). This all means that applying the described rules of taxation may lead to the taxation of virtual income (e.g. if, before the payment of the dividend, shareholders who bore the burden of monthly income tax advances sell their shares in the LJSP).

Long-standing dispute and landmark resolution
The described situation has brought plenty of disputes between the tax authorities and taxpayers as to the solution of this problematic situation. The tax authorities consequently sustain their position that, irrespective of the practical problems, shareholders of LJSP must declare and pay their income taxes on the same basis as other partners in partnerships. Taxpayers have claimed that no income taxation should appear before the income is actually paid to the shareholder as a dividend.

The resolution of the Supreme Administrative Court supported the taxpayers’ view. The Court stated that the taxation of the LJSP shareholders’ income should be postponed up to the moment of dividend payment. The resolution is a formally binding guideline for other administrative courts.

Tax optimization opportunities
After the resolution, LJSPs may become a useful tool in tax planning for Polish and foreign investors. First of all, investors may significantly postpone the effective taxation of the profits to the moment of their distribution. This may be important for a business allocating its profits for investments. In addition, the individuals involved as shareholders in an LJSP may avoid “double” taxation present in the case of activities conducted through the companies (i.e. in LJSP the income tax on profits is paid once—directly at the shareholder level, while in the case of companies the profit is taxed once at the company level and later on the distribution of a dividend to individual shareholders). The LJSP may be also used in other ways as part of a tax planning mechanism provided for investments in Poland.

Potential threats
Given the new opportunities related to LJSPs, we cannot forget about the potential threats. It needs to be underlined that the interpretation provided in the resolution is still not respected by the tax authorities. In addition, due Polish budget problems and intensive research by the Ministry of Finance aiming to “plug all the leaks” in the Polish tax system, we can expect new legislation in this respect. New amendments to income tax regulations will probably be aimed at eliminating the current privileged tax position of LJSP shareholders.

Maciej Grela tax advisor at Gide Loyrette Nouel law firm

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