The acquisition of shares in foreign partnerships by individuals who are Polish tax residents is increasingly common in Poland. Such a situation occurs, for example, as a result of incentive programs or participation in capital structures of investment funds. The lack of clear regulations and well-established practice creates questions on the tax consequences of such events..

General characteristics of the most common types of foreign partnerships.

In a typical situation, a Polish tax resident joins a foreign partnership under American or Luxembourg law, which is a tax transparent entity (English limited partnership or French société en commandite spéciale). The structure of these entities is similar to the Polish limited partnership. This means that there are partners who have limited liability for the company's obligations (usually this is the role of Polish tax residents), as well as a partner(s) who have such liability in an unlimited manner.

Unlike a Polish limited partnership, however, the foreign companies indicated above are not subject to corporate income tax.

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Income from foreign partnerships and PIT in Poland.

According to the general rules, income and expenses from participation in a partnership should be accounted for by its partners proportionally to their share of profit. This rule also applies to partners of foreign companies.

The main doubt related to the settlement of income earned through foreign partnerships is whether income and expenses in this regard should be determined "on an ongoing basis," i.e. on the date when income is earned/tax expenses are incurred (i.e., as in the case of Polish partnerships), or whether the subject of taxation should only be the actual receivables (e.g., as part of a profit distribution after the end of the year) received from the foreign partnership.

The issue is divergently resolved in case law and interpretations. Tax authorities, however, most often assume that tax income and expenses should be recognized "on an ongoing basis". This would imply fairly detailed tax reporting for the purpose of calculating the amount of advance income tax payments (monthly or quarterly). However, there are court rulings adopting a more favorable position for taxpayers, according to which tax income arises according to the cash method, and therefore only at the time of actual receipt of income.

Another fundamental tax issue related to the qualification of income earned by individuals is the determination of the appropriate source of income. This issue has been variously resolved in the past. Nevertheless, according to the current prevailing view, income from participation in a foreign partnership must be qualified as business income.

Do partners of foreign partnerships conduct business activities in Poland?

Recognizing that the income of partners of foreign partnerships should be included in the source of income in the form of economic activity raises the question of whether, in connection with this event, an obligation arises on the part of individuals to register as entities conducting independent economic activity.

It seems that individuals (Polish tax residents) have no such obligation. It is difficult to consider that the mere fact of participation in such a company fulfills the conditions for conducting business activity within the meaning of the PIT Law and the Entrepreneurs' Law, i.e. conducting activity in an organized and continuous manner. Activities in this regard tend to be passive in nature and are characteristic of owning capital rather than actively using it.

The above means that in most typical cases, holding shares in a foreign partnership will not be a title to social and health insurance coverage in Poland.

Choosing a form of taxation.

Since the income from participation in a foreign partnership should be qualified to a source in the form of business activity, it becomes necessary to choose the appropriate form of taxation. In principle, there is no obstacle for an individual to choose any available form in this regard (tax scale, flat tax, lump sum on registered income). The choice of the most profitable form will depend on the circumstances of the particular case. However, it seems that in many cases the most cost-effective method will be lump sum on registered income. This is due to the lack of taxation of flat-rate income with a solidarity levy, i.e. a 4% levy on the excess of qualified income over PLN 1 million per year.

It is worth noting at this point that people participating in incentive programs or involved in capital structures created by investment funds often already have a sole proprietorship. This will be the case, for example, in the situation of Polish software developers ooperating on the basis of B2B contracts, who are offered participation in an incentive program involving participation in an American limited partnership. In such a situation, it is necessary to take into account the limitations on the choice of taxation form under the PIT Law related to the inability to choose a tax scale and a flat tax in the same tax year.

Other practical aspects.

This post does not exhaust the topic of tax aspects of participation of Polish individuals in a foreign partnership. The following should also be considered in this regard:

- Regulations on foreign controlled companies;
- The tax status of the foreign partnership in its country of domicile (including whether it is a so-called tax permanent establishment);
- The tax consequences of "exiting" from a structure involving a foreign partnership, i.e., the taxation of income earned in connection with the sale of a partnership interest.

Therefore, any structure involving the participation of Polish tax resident individuals in foreign partnerships should be analyzed individually.