Taxation of Polish companies from A to Z
The amount of tax burdens is one of elements determining the choice of form of the business activity. This article presents the way in which companies and their shareholders are taxed in Poland.
We would like to point out that residents of other countries than Poland, such as the European Union, joining a Polish company as shareholders should remember that the appropriate double taxation agreement made between Poland and the country of their tax residence may introduce special rules regarding the taxation of profits generated through the Polish company, depending on the method of avoiding double taxation.
General partnership as an example of a tax-transparent company
In the case of a general partnership, we deal with the so-called tax transparency in terms of income tax. The company is not an independent taxpayer – each of its shareholders recognises and taxes the revenue and costs generated by the company in the proportion in which it participates in its profit, combining them with its other taxable income. Therefore, the company is not obliged to submit tax returns in the scope of income tax or tax payment, but it only submits information to its shareholders who are obliged to take this into account in their own settlements.
The company’s income is subject to single taxation – the subsequent payment of the profit to the shareholders is tax-neutral.
The shareholders in the general partnership, depending on their status, pay personal income tax (PIT) or corporate income tax (CIT).
The income from the share in the general partnership is treated in terms of the Polish PIT Act generally as the income from business activities. Shareholders being natural persons may tax the generated income according to the tax scale, the linear tax and in some cases the lump-sum tax on registered revenue.
The tax scale is the default form of taxation of natural person. The characteristic feature of the scale is the tax progression consisting in the application of rates based on the amount of income, i.e.:
12% on the amount of the income of PLN 120,000 per tax year,
32% on the surplus of the income over this amount.
The tax-free amount of PLN 30,000 per tax year also applies.
The income obtained by the general partnership’s shareholders is the basis for calculating the health insurance contribution, regardless of the form of settlement chosen by the taxpayer. In the case of the tax scale, the health contribution is calculated at the rate of 9%. The basis for calculating the contribution is the income generated in the previous month, with the assumption that it cannot be lower than the amount of the minimum wage applicable in a given year.
The second form of taxation that can be applied is the linear tax. It consists in the application of the rate of 19%, regardless of the amount of the income generated. In the case of the linear tax, the health insurance contribution is calculated on the same basis as in the case of the tax scale, however the rate amounts to 4.9%.
It is important to note that the income of natural persons taxed with the scale and the linear tax are included in the tax base with the solidarity surcharge, whose rate is 4%. It is calculated from the income exceeding the amount of PLN 1 million during one tax year.
If the revenue obtained by the general partnership did not exceed the equivalent of EUR 2 million in the previous tax year, its shareholders can also choose the taxation of revenue with the lump-sum tax on registered revenue. This form of taxation is possible if all shareholders choose it.
In contrast to the linear tax and the tax scale, the lump-sum tax applies to the revenue, without taking into account the tax costs. The lump-sum tax ranges from 2% to 17%, depending on the subject of the business activities.
The health insurance contribution for payers of the lump-sum tax will depend on the value of the revenue of a given entrepreneur, the basis of the calculation will be 60%, 100% or 180% of average remuneration with annual revenue not exceeding PLN 60,000, revenue of PLN 300,000, or revenue above PLN 300,000, respectively. The rate is 9% of the basis for its calculation.
In the case of all the indicated forms of taxation, shareholders of a general partnership being natural persons are also covered by compulsory social insurance.
It should be indicated that the tax transparency concerns only the income tax. As a separate legal entity, a general partnership can be the payer of e.g. value added tax, the tax on civil law transactions, or real estate tax. In this scope, the company is obliged to submit returns and to settle the amounts due.
Can a general partnership become a CIT payer?
In specific cases, a general partnership can be a CIT payer. It is possible in the case of companies whose shareholders are not only natural persons, but also other companies.
If such a general partnership wants to maintain tax transparency, it must fulfil certain obligations. The information (on the CIT-15J form) together with an annex should be submitted before the beginning of each subsequent tax year to the head of the tax office competent for the general partnership’s registered office. In addition, the set of required documents should be submitted to the tax offices competent for each of the shareholders (if they are different from the office competent for the company).
Failure to fulfil these obligations in a timely manner means that the company obtains the status of a CIT payer. This is an irreversible situation – until its liquidation or deletion from the proper register.
General rules of taxation of companies being CIT payers
The group of payers of the corporate income tax include limited partnerships, limited joint-stock partnerships, limited liability companies, joint-stock companies, simple joint-stock companies and some general partnerships (as described above).
A company being a CIT payer is obliged to tax its income on an ongoing basis generally at the rate of 19% or 9%. The CIT rate of 9% is applied to the taxation of income other than capital gains and can be used e.g. by the so-called small taxpayers, i.e. by commercial companies whose turnover in the previous tax year did not exceed EUR 2 million gross.
The payment of profit to a shareholder of a company being a CIT payer results in the occurrence of revenue on the part of the shareholder and the necessity to tax it at 19% PIT/CIT (depending on the status). Therefore, in the economic sense, the effect of double taxation is created (first at the company level, then at the shareholder level).
However, fulfilling specific conditions makes it possible to exempt the dividends paid to shareholders being CIT payers from taxation (the so-called dividend exemption), in particular the company receiving the dividend must directly have no less than 10% of shares in the capital of the company paying the dividend for at least 2 years (in the case of Switzerland, this threshold is 25%) – importantly, this condition can also be fulfilled after the payment of the dividend.
If the dividend is paid by the company to a foreign entities, the declaration on the fulfilment of the exemption conditions should also contain the confirmation that this foreign company is the actual recipient (beneficial owner) of the amounts paid. In addition, it is necessary to document the location of the registered office for tax purposes with a certificate of tax residence.
Since 2021, limited partnerships have been payers of CIT.
There are two types of partners in a limited partnership – general partners and limited partners. The status of the partner may have an impact on the amount of the economic burden of the tax.
On the payment of profit, general partners may apply the so-called deduction mechanism. It consists in the fact that it is possible to deduct part of the tax paid by the company from the amount of the tax calculated in connection with the payment received. The amount to be deducted is determined in the proportion in which the general partner participates in the company’s profit. Therefore, depending on the tax rate, the general partner will not incur the economic burden of the tax (in the case of the CIT rate of 19%), or the effective taxation at the time of the profit payment will be approx. 17.3% (in the case of the CIT rate of 9%). It is important to note that the general partner has the right to deduct only the CIT that was paid.
Tax preferences have also been specified for the payment of profit to the second type of partner. The revenue obtained by the limited partner is exempt from 50% of the income tax, while the exemption cannot exceed the amount of PLN 60,000. Importantly, the amount of the exemption is applied separately for each limited partnership in which the taxpayer is a limited partner. A limited partner that is not associated in a certain way with the general partner of this company has no right to apply such a deduction.
In the case of limited partners being CIT payers, it is also possible to apply the dividend exemption discussed above.
Partners of a limited partnership being natural persons are obliged to pay health and social insurance contributions. The social insurance contributions are calculated according to the same rules as in the case of partners of general partnerships. The health insurance contribution is calculated in a different way. The basis for determining the contribution for general partners and limited partners is the value of the average monthly remuneration in the fourth quarter of the previous year. The contribution is calculated by applying the rate of 9%.
Limited joint-stock partnerships
Similarly to a limited partnership, a limited joint-stock partnership has two types of partners – general partners and shareholders. The payment of profits to general partners is subject to taxation according to the same rules as in the case of general partners in a limited partnership.
Differences in the taxation of partners occur at the shareholder level. In this case, it is not possible to apply the deduction mechanism. As a rule, the payment of dividends to a shareholder is connected with the collection of tax in the amount of 19%. However, in relation to shareholders being CIT payers, it is also possible to apply the dividend exemption.
The general partners in this company will be obliged to pay health and social insurance contributions according to the same rules as partners of a limited partnership.
The group of share-holding companies includes limited liability companies, joint-stock companies and simple joint-stock companies. All share-holding companies have legal personality; therefore, they are CIT payers on total income earned.
The profits generated by share-holding companies are paid to the partners in the form of dividends on which capital gains tax is collected in the amount of 19%. The calculation, collection and payment of the tax to the competent tax office are the responsibilities of the company that plays the role of the payer. Hence, the partners receive the amount already reduced by the tax due.
The only exception when the company does not collect the corporate tax is when the partner is another CIT payer entitled to benefit from the dividend exemption.
Health and social insurance contributions in share-holding companies
As a rule, partners of share-holding companies being natural partners are not covered by compulsory social insurance. The exceptions are partners in a single-person limited liability company and some shareholders in a simple joint-stock company that pay health and social insurance contributions according to the same rules as partners of limited partnerships.
Estonian CIT – is it worth choosing it?
Almost all companies being CIT payers may benefit from the preferential form of taxation – the lump-sum tax on the income of companies, also called the Estonian CIT. More about taxation with the Estonian CIT can be found in our article Limited liability company on the Estonian CIT – is it worth choosing it?