Exemption of a limited partnership from the obligation to collect tax on advances paid to general partners – a success for HWW Law Firm

HWW Law Firm successfully led to a favorable tax ruling for a company planning to convert to a limited partnership, protecting it from the obligation to collect lump-sum income tax on advances paid to general partners during the tax year. The Law Firm’s position was confirmed at both stages of the administrative court proceedings – even though the tax authority decided to appeal the first instance judgment favorable to the client.

Background on the case

The law firm’s client was a limited liability company planning to convert to a limited partnership, in which the partners would be general partners who were individuals and a limited partner in the form of a limited liability company. Under the planned structure, the company intended to make monthly profit-sharing advances to the general partners while the fiscal year was still ongoing.

Since limited partnerships have become corporate income taxpayers, the partnership, as payer, has special obligations to calculate and collect a lump-sum PIT tax on distributions to general partners. The client has raised reasonable doubts as to whether this obligation updates already at the time of the advance payment – before the amount of CIT due to the company for the year is known.

The problem and the authority’s position

In an individual interpretation dated August 31, 2023, the Director of the National Tax Information Service held that the advance payment made to the general partner constitutes income from a share in the profit of the legal entity arising at the time of payment, and the company is obliged to immediately collect a 19% flat tax. This position threatened the client not only with ongoing administrative obligations, but above all with the risk of an incorrect tax calculation – bypassing the company’s CIT deduction mechanism, which the legislature introduced precisely to eliminate double taxation of the general partner’s profit.

Strategy and activities of the law firm

The firm challenged the authority’s position, developing an argument based on a strict linguistic interpretation of the provisions of Article 41(4e) and Article 30a(6a-6e) of the PIT Law. A key element of the strategy was to demonstrate that the legislator deliberately made the calculation of the general partner’s lump-sum tax dependent on the prior determination of the company’s CIT due for the tax year – and that this value, by its very nature, cannot be known before the year closes. Without it, the calculation of the correct amount of tax liability is objectively impossible.

The law firm further pointed out the fundamental difference between the tax obligation itself (which arises at the time of the advance payment) and the tax liability (which is concretized only after the end of the year, when all the calculation elements are known). It was also pointed out that the legislator deliberately did not introduce an obligation for this type of payment to collect advance payments by the payer – which is not a loophole in the law, but a conscious legislative decision.

The first victory – the judgment of the WSA and the appeal of the authority

The Provincial Administrative Court in Warsaw, in a judgment dated January 11, 2024 (ref. III SA/Wa 2369/23), overruled the unfavorable interpretation of the Director of the KIS, fully sharing the arguments presented by the party. The court confirmed that since it is necessary to know the company’s annual CIT in order to properly calculate the tax on the general partner, the payer’s obligation cannot update earlier than after the end of the tax year and the filing of the CIT-8 return.

The director of the KIS did not accept this ruling and filed a cassation appeal with the Supreme Administrative Court, maintaining the position that a limited partnership is obliged to collect 19% tax already at the time of each advance payment, regardless of the fact that the final amount of the company’s CIT remains unknown at that time.

Final decision of the Supreme Administrative Court

The Supreme Administrative Court dismissed the cassation appeal of the authority in a judgment under II FSK 447/24, prejudging the case in favor of the client. The NSA fully confirmed that a limited partnership paying advance profit payments to its general partners during the tax year does not have the status of a payer and is not obliged to collect flat-rate income tax – as long as the company’s CIT for the year is not known. In doing so, the court stressed that the mechanism for the elimination of double taxation designed by the legislature must be applied in its entirety, and the authority’s interpretation would lead to the determination of the tax base based on non-statutory criteria – in violation of Article 217 of the Polish Constitution.

Significance of the settlement

The NSA’s ruling is part of a well-established line of case law and provides an important safeguard for all limited partnerships making profit advances to general partners. It confirms that the mechanism for eliminating double taxation must be applied in its entirety – and not selectively, in isolation from its design. The settlement protects taxpayers while providing limited partnerships with a clear basis for not adhering to the tax authorities’ expansive interpretation.

The law firm’s team responsible for handling the case

The following were responsible for handling the case on the law firm’s side:

• Mikolaj Hewelt – attorney, tax advisor, restructuring advisor, partner,
• Matthew Kowalski – legal counselor, tax advisor,
• Piotr Magda – legal counsel.