Optimisation of taxation of income earned by individuals from involvement in a company is increasingly pushing company partners to transform their company into a limited partnership or limited joint-stock company. This solution avoids the double taxation of dividends paid to partners who are individuals due to the fact that the partnership is not liable to pay corporate income tax. At the same time, running a business as a limited partnership and a limited joint-stock partnership carries a significant limitation of personal liability for the partners.

However, it should be remembered that the transformation of a company into a partnership under the provisions of Art. 551 and those following of the Code of Commercial Companies may, in certain circumstances, give rise to a liability to tax on the basis of the Act on Tax on Civil Law Transactions (the “PCC Act").

In accordance with the provisions of the PCC Act, tax on civil law transactions at a rate of 0.5% applies amendments to the articles of a company if the change to the articles results in an increase in the basis for tax on civil law transactions (art 1 par. 1 (1k) in connection with art. 1 par. 1 (2) of the PCC Act). A change in the articles of association of a company is understood according to the PCC Act as a transformation resulting in, respectively, an increase in the assets of a partnership or an increase in the share capital of a company (art 1 3 (3) of the PCC Act).

The imprecise provision of art. 1 par. 3 (3) of the PCC Act has resulted in significant practical difficulties in determining whether in a particular case as a result of a transformation an increase in the assets of a partnership has occurred causing a tax obligation on the basis of the PCC Act.

In the light of the provisions of the Commercial Companies Code, the assets of a transformed partnership are the sum of the contributions from the partners, the value of which is determined based on the assets of the transformed company attributable to each partner. For most of transformations there is no change in the composition of the partners in the company being transformed, and the existing partners do not make new contributions to the company, the value of which could increase the value of the assets of the transformed company.

In principle, therefore, the value of the assets of the transformed partnership is the sum of the equity capital of the transformed company, which consists of funds held by the company converted to share capital, as well as the reserves and capital reserves and retained earnings of the transformed company. From a practical point of view, the value of the assets of the transformed partnership and the value of the assets of the transformed company can be said to be equal, and in a number of individual interpretations and judgments of the Administrative Courts the view has been presented that in connection with the transformation no tax obligation has been created under the PCC Act (see the individual interpretation of the Director of the Tax Chamber in Lodz on December 4, 2012 (No. IPTPB2/436-148/12-2/KK), the individual interpretation of the Director of the Tax Chamber in Poznan issued 10 May 2011 (No. ILPB2/436-47 / 11-2/MK).

Unfortunately, in recent times there has been a narrowing of the interpretation of the term company assets under the provisions of the PCC Act. It was presented to the Provincial Administrative Court in Wrocław dated 14 February 2013 (I SA/Wr1549/12) and the Provincial Administrative Court in Bydgoszcz, dated 2 February 2013 (I SA/Bd2/13).

According to these judgments, the concept of the assets of a company transformed on the basis of the PCC should be limited to the share capital of a company. This results in the consequence that in the event of a change in a company’s articles in connection with a transformation, the ratio between the assets of the partnership, understood as the sum of the contributions to the partnership, and the share capital of a company will be analysed, and not - as would indicate a literal interpretation of art. 1 par. 3 point 3 of the PCC - the ratio of the assets of the partnership and the assets of the company, defined as the sum of the companies’ equity. As a consequence of this interpretation, tax on civil law transactions would apply to the difference between the value of the assets transferred to the partnership and the amount of previously taxed share capital of the company.

In support of this position, the above cited administrative courts have opted for a systematic interpretation of the provisions of the PCC Act, focusing on art. 6 par. 1 (8f) of the PCC Act, which defines the tax base in respect of a transformation and art. 9 par. 11 (a) of the PCC Act, which provides for an exemption from tax on civil law transactions in respect of transformation. In accordance with art. 6 par. 1 (8f) of the PCC Act, the tax basis in respect of a transformation is the value of contributions to a partnership resulting from a transformation or the value of the share capital of a company resulting from a transformation or merger. At the same time, art. 9 par 11 (a) of the PCC Act provides an exemption from the tax for articles of association and their amendments associated with the transformation or merger of companies in respect to contributions to the company or to share capital the value of which was previously taxed by tax on civil law transactions or tax on capital contributions to capital companies in a Member State other than the Republic of Poland or on activities that in accordance with the law of the Member State tax was not charged.

The combined analysis of these leads to the conclusion, according to the administrative courts cited above, that the intention of the legislature was to tax upon the transformation of a company into a partnership the contributions to the partnership above the level that was previously subject to tax in relation to the payment of contributions to the share capital of a company.

According to the administrative courts, the interpretation of the provisions relating to an amendment in the articles of association in respect of a transformation and the tax base in respect of transformation, except for the exemption referred to in art. 9 par 11 (a) of the PCC Act, would result in that the regulations contained in the latter provisions would be superfluous, because in fact in connection with the transformation an increase in the assets of a partnership giving rise to the tax on civil law would never have occurred and this in turn would be contrary to the principle of a rational legislator. A full explanation of this view suggests that the tax base upon a transformation is the value of the contributions from the transformation without any additional contributions made by way of the transformation. The payment of additional contributions would be subject to tax on the basis of art. 6 par. 1 (8b) of the PCC Act, which provides that the tax base upon an  increase or payment of contributions to a partnership is the value of contributions increasing the assets of the partnership.

In conclusion, it should be noted that according to the most recent line of case law, when the assets of a transformed partnership  created by the transformation, understood as the sum of the contributions to the partnership, exceed the share capital of the transformed company the surplus, due to not being taxed earlier, is subject to tax on civil law transactions.

The purpose of this article is to introduce clients to issues relating to tax on civil law transactions upon the transformation of a company into a partnership. This article does not constitute legal advice and cannot replace individual legal advice. In order to obtain comprehensive and binding legal advice, please contact your advisor in the Office or one of the managing partners.

Prepared by: Iwona Sirocka, legal counsel