Transformation of a capital company into a partnership - PCC tax

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Entrepreneurs wishing to run a business can choose the form of running it. When making a choice, we must remember that the form of running a business has a large impact on its subsequent functioning. Entrepreneurs who find that they made the wrong choice have the option of changing the form of running a business. When transforming, the entrepreneur must take into account the costs, including tax costs. In the article we will describe whether the transformation of a capital company into a partnership is subject to PCC tax.

Is the partnership agreement subject to PCC tax?

Pursuant to Art. 1 clause 1 point 1 lit. k) and point 2 of the Act of September 9, 2000 on tax on civil law transactions (Journal of Laws of 2017, item 1150), hereinafter referred to as the "PCC Act", this tax is subject to articles of association and amendments to these agreements, if they result in they increase the tax base with the tax on civil law transactions, subject to paragraph 3 point 4.

Based on Article. 1 clause 3 point 3 of the PCC Act, in the case of a partnership agreement, an amendment to the agreement is considered to be a transformation or merger of companies, if they result in an increase in the assets of a partnership or an increase in share capital.

Pursuant to Art. 1a point 1 of the PCC Act, the term "partnership" used in this Act means a partnership, general partnership, limited partnership or limited joint-stock partnership.

From the content of art. 3 sec. 1 point 1 of the PCC Act, it follows that the tax obligation arises at the moment of performing a civil law transaction, i.e. at the moment of concluding a partnership agreement or amending this agreement. Pursuant to Art. 4 point 9 of the above-mentioned of the Act, the tax obligation rests with the company.

The tax base in accordance with art. 6 sec. 1 point 8 lit. f) of the PCC Act is - when transforming or merging companies - the value of contributions to a partnership created as a result of the transformation or the value of the share capital of a capital company created as a result of a transformation or merger.

Transformation of a capital company into a partnership

At the outset, a question should be asked whether, in the event of a transformation of a capital company into a partnership, there will be an increase in the assets of the transformed company, which under the provisions of the Act on tax on civil law transactions is a condition for taxing the activities of transforming companies. In order to illustrate the problem easier, we will use an example.

Example 1.

The entrepreneur is considering changing the form of running a business from a joint-stock company to a general partnership. Due to the above transformation, jointly the share capital and supplementary capital of the joint-stock company will be contributed to cover the contributions in the general partnership. The sum of the value of contributions in the general partnership will be equal to the sum of the value of share capital and supplementary capital in a joint-stock company. All the assets of a joint-stock company that have been accumulated in the course of its operation will become the property of the general partnership. In summary, wealth will not increase or decrease. No additional assets will be contributed upon the transformation. Moreover, no new partners will join the Company.

In the light of the above provisions, if there is no increase in the company's assets, such transformation is not subject to taxation with PCC. In our case, however, not only the share capital is transferred, but also the supplementary capital.

Is the transformation of a joint stock company into a general partnership subject to PCC tax?

As we have already emphasized, in the present case, not only the share capital of a joint-stock company is transferred, but also all its assets.

In the case of capital companies, including a joint-stock company, at the time of concluding the articles of association, the share capital is subject to taxation, which results from Art. 6 sec. 1 point 8 lit. and the PCC Act in connection with Art. 1 clause 1 point 1 lit. k of the PCC Act - on the conclusion of the articles of association, the tax base is the value of the share capital. Pursuant to Art. 9 point 11 lit. and the PCC Act, in which the PCC tax exemptions are listed, such exemption applies to the articles of association and its amendments related to the transformation or merger of companies in part of contributions to the company or share capital, the value of which was previously subject to tax on civil law transactions or capital contributions tax to limited liability companies in the territory of a Member State other than the Republic of Poland, or from which, in accordance with the law of a Member State, tax was not charged.

Taking into account the content of Art. 6 sec. 1 point 8 lit. f of the PCC Act, which specifying the tax base in the case of a partnership agreement - when transforming or merging companies - indicates that it is the value of contributions to the partnership resulting from the transformation. In our case, the amount of contributions made to a partnership is the share capital and supplementary capital.

Taking into account the above-mentioned objective exemption from Art. 9 point 11 lit. and the PCC Act, the tax base will be the value of the contributions less that which was previously taxed as the share capital of the transformed company.

Taxation of PCC tax on the assets of a joint-stock company

In the case of transformation of a joint-stock company into a general partnership, only the share capital previously taxed with PCC will benefit from the exemption. The remaining part of the property, which will be transferred to a newly formed partnership, is subject to PCC tax. The above is confirmed by the resolution of the Supreme Administrative Court in Warsaw of May 15, 2017, file ref. act II FPS 1/17, in which we read:

”Therefore, referring to the question presented to the bench of seven judges of the Supreme Administrative Court, it should be stated that in the legal state in force from 1 January 2009, tax on civil law transactions is subject to, pursuant to Art. 1 clause 3 point 3 in connection with from paragraph 1 point 1 lit. k, the Act of September 9, 2000 on tax on civil law transactions (Journal of Laws of 2007, No. 68, item 450, as amended) . Taking into account the principles of legal interpretation presented above and the reasoning based on them in the subject of the presented legal issue, the Supreme Administrative Court pursuant to Art. 15 § 1 point 3 and art. 264 § 1 and 2 of the AA. adopted a resolution on the content of being subject to taxation with tax on civil law transactions in respect of amendments to the articles of association, consisting in the transformation of a joint-stock company into a general partnership ”.

Thus, when transforming a business conducted in the form of a capital company into a partnership, we must take into account the taxation of PCC.

The amount of the PCC tax rate

Pursuant to Art. 7 sec. 1 point 9 of the PCC Act, the tax rate on the articles of association is 0.5%. In our case, the tax base will be reduced by the share capital that has already been taxed. The tax obligation will rest with the newly established partnership.