Liquidation of a civil law partnership - what obligations does it involve?

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A civil law partnership is one of the most popular forms of running a business. The liquidation of a civil law partnership imposes on entrepreneurs the fulfillment of many obligations under the tax law. Failure to do so could lead to negative financial consequences.

A civil law partnership is established on the basis of a civil law contract. By the partnership agreement, the partners undertake to strive to achieve a common economic goal by acting in a designated manner, in particular by making contributions.

A civil law partnership does not have legal personality, nor is it an entrepreneur within the meaning of the Entrepreneurs' Law. On the other hand, entrepreneurs are partners of a civil partnership in the scope of their economic activity.

Liquidation of a civil law partnership based on PIT

Revenues from participation in a company that is not a legal person, from joint ownership, joint venture, joint ownership or joint use of things or property rights in each taxpayer shall be determined in proportion to his right in profit sharing.

Pursuant to Art. 8 sec. 2 of the PIT Act, the principles expressed in par. 1 shall apply mutatis mutandis to:

  • settlement of tax deductible costs, non-tax deductible expenses and losses,

  • tax reliefs related to the business conducted in the form of a company that is not a legal person.

In the event of liquidation of a civil law partnership, no income is generated for the partners receiving cash and assets of the liquidated company.

According to Art. 14 sec. 3 points 10 and 12, the revenues do not include:

  • funds received by a partner of a company that is not a legal person due to the liquidation of such a company;

  • revenues from the sale of assets for consideration:

    1. remaining as at the date of liquidation of self-run business or independent special departments of agricultural production,
    2. received in connection with the liquidation of a company that is not a legal person or the withdrawal of a partner from such a company

- if from the first day of the month following the month in which the liquidation of: self-run economic activity, independent special departments of agricultural production, a company that is not a legal person or there was a withdrawal of a partner from such a company, six years have elapsed and disposal for consideration does not take place in the performance of economic activity or special departments of agricultural production;

On the other hand, income will arise if the partners sell the assets that they received as a result of liquidation against payment, and 6 years have not elapsed from the first day of the month following the month in which the liquidation took place until the date of their sale.

Shareholders are required to prepare a list of assets containing at least the following data: ordinal number, identification (name) of the asset, date of acquisition of the asset, the amount of expenses incurred to acquire the asset and the amount of expenses incurred to acquire the asset classified as tax deductible costs, initial, depreciation method, sum of depreciation charges and the amount of cash paid due to partners for participation in a company that is not a legal person as at the date of its liquidation (Article 24 (3a) of the PIT Act).

In addition, a physical inventory must be prepared (§ 27 (1) of the Regulation on keeping a tax book of revenues and expenses). This obligation was imposed on taxpayers of income tax, which means that the inventory is made by the partners, as they are the taxpayers and not the company.

VAT and liquidation of a civil law partnership

Pursuant to Art. 14 sec. 1 and 4 of the VAT Act, in the event of cessation of business activity by a natural person or liquidation of business activity by companies, the following are subject to:

  • goods of own production,

  • goods which, after their purchase, were not the subject of a supply of goods which were entitled to a reduction in the amount of tax due by the amount of the input tax.

Including real estate in the inventory is very often an issue that raises doubts among taxpayers. The VAT Act treats materials, goods and fixed assets in the same way, which should be shown in the liquidation inventory, if the taxpayer was entitled to deduct VAT on these assets.

Thus, the premises should be included in the liquidation inventory. The regulations do not explicitly specify the rate at which the goods included in the liquidation inventory are taxed. There is no doubt, however, that goods under the liquidation inventory are subject to VAT at the rate appropriate for these goods. This also applies to land, buildings, structures and their parts subject to taxation under the liquidation inventory.

And so, pursuant to the provision of Art. 43 sec. 1 point 10 of the VAT Act, the supply of buildings, structures or parts thereof is exempt from tax, except when:

  1. the delivery is made within or before the first settlement,

  2. a period of less than 2 years has elapsed between the first occupancy and the delivery of the building, structure or parts thereof.

In the light of the above-mentioned provision, the key to determining the taxation rules for the delivery of a building is to determine when it was first occupied and what period has elapsed since then.

By the first settlement, in accordance with Art. 2 point 14 of the VAT Act, it shall be understood as putting into use, in the performance of taxable activities, to the first buyer or user of buildings, structures or parts thereof, after their:

  1. construction or

  2. improvement, if the expenses incurred for the improvement, within the meaning of the income tax regulations, constituted at least 30% of the initial value.

It follows from the above-mentioned provisions that the real estate listed in the liquidation inventory, if they meet the conditions specified in the regulations, may be exempt from VAT. Exclusion from this exemption occurs when the delivery is made as part of the first settlement or before it, and when at least 2 years have passed since the first settlement.

Such a position was confirmed by the Director of the Tax Chamber in Poznań, in the individual ruling of June 30, 2015, ref. No. ILPP5 / 4512-1-66 / 15-2 / KG, in which we can read:

(...) the presented future event at the moment of the Applicant's cessation of business activity, which is part of the assets of the company being liquidated. 43 sec. 1 point 10 of the Act, in relation to the above-mentioned Real estate The interested party will be able to take advantage of the VAT exemption. (...)