The general partnership is one of the frequently encountered forms of running a business in Poland. In projects of ownership restructuring involving a family foundation, the question regularly arises what will happen to a general partnership if the family foundation becomes its shareholder. The legal and tax effect of such a decision is significant and requires conscious preparation. PLA.partners advises private clients on how to arrange this change without negative consequences for the business.
Short answer, the general partnership becomes a CIT taxpayer
When a family foundation joins a Polish general partnership, the partnership automatically becomes a corporate income tax payer. Losing tax transparency, it changes the model of its taxation, income is taxed at the partnership level, not at the level of the partners. This is a systemically significant change, since the previous functioning model of the general partnership is transformed.
Maciej Pilarek, attorney and partner at PLA.partners, points out that this change is not an inevitable cost of the family foundation joining the general partnership. It may be properly planned, and it is often worth considering whether joining a general partnership is the best form of entry of the family foundation into the structure, or whether it is better to first convert the partnership into a capital company.
Consequence for the general partnership, tax settlement model
After the family foundation joins, the general partnership is taxed under CIT at the partnership level, similarly to a limited liability company. The partners no longer account on a current basis for the income generated by the partnership. Profit paid out by the general partnership is then treated as a payment similar to a dividend.
In the practice of the PLA.partners team, this parameter has a significant impact on the partnership’s economics. Partners who are natural persons lose the advantage of settling the profit directly under their own rules, and the structure as a whole shifts toward a model typical for capital companies.
Dividends to the family foundation under the new construction
Although the general partnership becomes a CIT taxpayer, the family foundation still benefits from the corporate income tax exemption with respect to the dividends it receives from the partnership. Receiving dividends falls within the catalogue of its permitted activity. This parameter preserves the attractiveness of the model in which the foundation is a shareholder of the partnership, despite the change in the partnership’s tax status.
From the private client’s perspective this means that the family foundation as a shareholder of a general partnership retains its main tax advantages, although the partnership itself now operates under a regime different from the one before the foundation joined.
Is the better solution to convert the partnership?
In projects conducted by PLA.partners a frequently considered variant is an earlier conversion of the general partnership into a limited liability company or another capital company, and only then including the family foundation as a shareholder. Such a step allows the automatic change of the general partnership’s tax status to be avoided and the family foundation to be placed in a company whose regime is coherent from the outset.
PLA.partners experts analyse in each case whether direct admission of the family foundation to the general partnership is the better path, or whether an earlier conversion is preferable. The decision depends on the specifics of the partnership, the structure of partners and the founder’s goals.
Legal and business consequences for the client
From the decision-making perspective in a private company, joining a Polish general partnership by a family foundation means:
- automatic change of the general partnership’s tax status, CIT taxation at the partnership level,
- change in the partners’ tax settlement model,
- preservation of the family foundation’s dividend exemption,
- the need to re-analyse the partnership’s economics under the new construction,
- the need to assess the purpose of an earlier conversion of the partnership,
- the need for ongoing corporate servicing of the partnership in the new regime.
Possible actions, a plan for the business owner
In the work of the PLA.partners team, the decision on a family foundation joining a general partnership involves:
- analysis of the current model of the general partnership and its partners,
- assessment of the tax consequences of the family foundation joining,
- comparison with the scenario of converting the partnership before the foundation joins,
- design of the target structure with the participation of the family foundation,
- preparation of corporate and transactional documentation,
- implementation schedule covering possible conversion and joining.
Contact PLA.partners Law Firm
Do you need legal support or an individual analysis of your matter? Visit PLA.partners and contact our team, we will help assess the situation and propose specific solutions.
About the author
