VAT exemption limit for a partner running a separate business

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Many taxpayers conducting business activity benefit from the subjective exemption from VAT due to the sales limit. However, there are unusual cases where a natural person runs his own business and is a partner in a civil law partnership at the same time. In this case, how should the VAT exemption limit be calculated? Answer in this article.

Civil law partnership and sole proprietorship

First of all, it is necessary to pay attention to the specificity of a civil law partnership. According to Art. 860 of the Civil Code (hereinafter referred to as the Civil Code), by the partnership agreement, the partners undertake to strive to achieve a common economic goal by acting in a marked manner, in particular by making contributions. The articles of association should be confirmed in a letter.

A civil law partnership is therefore a type of contract. As a result, in business transactions, the legal entities are the partners of the company, and not the company itself. There are no legal obstacles for a partner in a civil partnership to conduct his separate business activity. At the same time, due to the special structure of a civil law partnership, it means a situation in which one person is an economic entity in the scope of his own business and at the same time is an economic entity as a partner in a civil partnership.

This is the case in the field of income tax, where the taxpayer is not a civil partnership, but individual partners who settle the tax in proportion to their share. A natural person may simultaneously run a sole proprietorship and be a partner in a civil partnership.

VAT exemption limit

The performance of taxable activities as part of business activity is generally subject to VAT. The VAT Act, however, indicates the possibility of using a subjective exemption.

According to Art. 113 paragraph. 1 of the Act, sales made by taxpayers whose sales value did not exceed the total of PLN 200,000 in the previous tax year are exempt from tax. The amount of tax is not included in the sales value.

Therefore, the question arises how to calculate the above limit of VAT exemption in the case of a person running a parallel business and being a partner in a civil law partnership. Is it correct to sum up the sales turnover in both forms of activity?

In order to answer this question correctly, it should be noted that the exemption provision indicates that the VAT exemption limit applies to the taxpayer. Therefore, it is necessary to explain how the VAT Act understands the concept of a taxpayer.

Pursuant to Art. 15 sec. 1 of the VAT Act, taxpayers are legal persons, organizational units without legal personality and natural persons who independently carry out economic activity, regardless of the purpose or result of such activity.

The content of the above provision indicates that the taxpayer is both natural persons and organizational units without legal personality. Due to its specific structure, a civil law partnership is classified as an organizational unit without legal personality. The provision does not list partners of a civil partnership in the category of taxpayers. Thus, unlike in the case of PIT, the taxpayer of value added tax is a civil law partnership, not its partners. The Value Added Tax Act recognizes a civil partnership as a taxpayer, not its partners.

Civil law partnership and partner as separate VAT payers

On the basis of the above findings, it can therefore be argued that both a natural person running a sole proprietorship and a civil partnership in which that person is a partner act as separate taxpayers within the meaning of Art. 15 sec. 1 above the law.

Both of these entities, when carrying out activities subject to tax on goods and services, are separate taxpayers carrying out sales on their own, which means that sales made by a natural person and sales within a civil partnership should be treated separately. Therefore, it is not correct to sum up the sales volume made by a taxpayer in a sole proprietorship with sales proportionally to that person as a partner in a civil law partnership.

Example 1.

A natural person runs a sole proprietorship, under which in the previous year it generated sales of PLN 150,000. Additionally, the same person is a partner of a four-person civil partnership. The sale of the civil law partnership was at the level of PLN 400,000. Since a natural person and a civil law partnership are two separate taxpayers, the sales of JDG (PLN 150,000) and the sales amount per partner of the civil law partnership (PLN 100,000) should not be added together. Due to the fact that a civil law partnership is a separate VAT taxpayer, the sales amount per shareholder of that company is not added to the sales made as part of sole proprietorship conducted by the partner. Start a free 30-day trial period with no strings attached!

VAT exemption limit - method of calculation

The above assumption also translates into the method of calculating the limit of subjective exemption from VAT. As already mentioned, sales made by the taxpayer are exempt. The exemption limit therefore applies to the sale made by a given taxpayer. Exceeding the above-mentioned the exemption limit results in the loss of the right to this exemption. The exemption ceases to apply when the tax obligation for the supply of goods and services arises, starting from the activity which has exceeded the limit.

As a consequence, only the sales made as part of this activity are included in the amount of PLN 200,000 for a sole proprietorship. This will be the case regardless of the fact that the same person is a partner in a civil partnership conducting parallel business activity. The value of sales as part of individual activities is unrelated to the value of sales of the civil law partnership. This is due to the fact that both entities are separate and independent VAT taxpayers. The right to the exemption will apply until a natural person running his own business exceeds the limit specified in art. 113 paragraph. 1 of the VAT Act.

Example 2.

The taxpayer runs a sole proprietorship, in which he achieved sales of PLN 120,000 in the previous year. In addition, the taxpayer is a partner in a civil law partnership that obtained sales of PLN 190,000 in the previous year. Both a natural person and a civil law partnership may benefit from a subjective exemption from VAT.

Example 3.

The taxpayer runs a sole proprietorship, in which he achieved sales of PLN 250,000 in the previous year. In addition, the taxpayer is a partner in a civil law partnership that obtained sales of PLN 190,000 in the previous year. In this situation, the natural person must register as an active VAT payer. On the other hand, a civil law partnership may still benefit from a subjective exemption.

Thus, as can be seen from the analyzed case, there may be various configurations in this type of activity. In each arrangement, however, the exemption limit should be calculated separately for sole proprietorship and for a civil partnership. In the event that a partner of a civil partnership additionally runs his own business, two limits for VAT exemption should be established. The issue of calculating and correctly determining the subjective exemption limit is very important in the context of VAT. Therefore, it should be remembered that the provisions of the VAT Act specifically define the group of separate taxpayers, which are both a civil partnership and a partner of the company running his own business.