After the changes introduced by the “Polish Deal”, the profitability of running a business in the form of a one-person business activity, a civil law partnership or a general partnership has decreased.
In many cases an attractive alternative to the above forms of business is currently a limited partnership or a limited liability company taxed with so-called “Estonian CIT”.
The disadvantages of these forms, that have so far often discouraged small businesses, are double taxation of profits - first with CIT and then with PIT upon distribution of profits, as well as higher costs and more formalities related to the establishment and conducting a business in these forms, incl. costs of maintaining full accounting books. However, in the current tax and legal set-up, the above-mentioned drawbacks are often offset by a system of PIT deductions provided for partners / shareholders of these companies, favorable rules for settling health insurance contributions and the lack of a ‘solidarity levy’ (4% tax for the wealthiest).
Limited Partnership
Currently we can see an increased interest in doing business in the form of a limited partnership. This structure offers some interesting solutions. It has two categories of partners. A ‘general partner’ runs the company’s affairs and is liable for the company's liabilities with all his assets. A ‘limited partner’ is generally a passive investor without management authority. As a rule, they provide a financial contribution and participate in profits. Their liability towards the company’s creditors is limited up to the amount agreed in the articles of association.
As regards taxation, a limited partnership is a CIT taxpayer. Its income is subject to either standard 19% rate or reduced 9% rate if a limited partnership has a ‘small taxpayer’ status (income not exceeding EUR 2M). Upon distribution of profits the income generated by a limited partnership is taxed on the level of partners as dividend income (with 19% PIT or CIT depending on the tax status of a partner). Effective overall taxation of income generated by a limited partnership is however lower due to system of PIT deductions (or a possibility of applying dividend income exemption in case of CIT taxpayer).
A general partner is entitled to deduct from his PIT tax a part of CIT tax paid by a limited partnership in proportion corresponding to his share in profits. As a result, the effective taxation of income generated by a limited partnership and paid to general partner is around 19% or even 17.3% when a limited partnership is a so-called „small taxpayer” subject to 9% CIT.
A limited partner, under certain conditions, may apply the tax exemption with relation to 50% of their income earned through a limited partnership - up to PLN 60,000 in a tax year.
A limited partnership may also benefit from so called ‘Estonian CIT’ regime, however, due to the described PIT deductions, this solution is less profitable than in the case of a limited liability company.
It should be noted as well that if a partner is a foreign tax resident, the above taxes are applied taking into account double taxation treaties.
Apart from the favorable taxation, a limited partnership offers also advantageous rules for settling health insurance contributions. They amount to 9% of the average monthly remuneration declared by Central Statistical Office (in 2023 they amount to about 650 PLN). They are not dependent on the actual income generated by a partnership or profits paid out to partners.
Limited liability company
A limited liability company is another legal form that recently has been gaining popularity.
The primary benefit it offers is the exclusion of the liability for the company's obligations on the part of business owners (shareholders are not liable with their private assets for the company's debts). Running a business in the form of limited liability company facilitates as well a sale of business or family succession.
Other significant advantage is the possibility to opt for an Estonian CIT model. Entering this taxation regime allows to defer payment of CIT until the company’s profits are paid out to shareholders. Moreover, even after the distribution of profits the overall effective taxation is lower than in case of a standard CIT regime. Due to special PIT deductions the sum of CIT and PIT tax burden amounts to 20% for ‘small taxpayers’ and 25% for standard taxpayers.
To apply Estonian CIT regime the company should meet the numerous requirements, in particular criteria referring to:
‘simple structure’ - only individuals can be shareholders and the company cannot have any subsidiaries.
‘minimal employment’ - the company should employ at least three employees; this condition is however less strict in case of newly established companies and ‘small taxpayers’.
‘revenue structure’- passive revenue (from interests, license fees, etc.) cannot exceed 50% of total revenue.
What’s important there are no regulations excluding the possibility to apply Estionian regime to Polish Company whose shareholders are foreign tax resident. Dividends paid out abroad are however subject not only to Polish provisions (also these implementing EU directives) but also to double taxation treaties.