Termination of a tax year during a financial year with a preference in the distribution of the general partner’s profit – we have an interpretation from the KIS

The application raised two questions: the first concerned whether, if a resolution to wind up the company and commence liquidation is passed in the 2023 calendar year, two tax years will arise; and whether, following the filing of CIT-8 return for the period up to the commencement of liquidation, the company would be entitled to reduce the flat-rate income tax on profit distributions to general partners by an amount equal to the product of each general partner’s percentage share in the company’s profit and the tax due on income for the period from the start of the year until the commencement of liquidation?

Regarding the first question, the company presented the position that the adoption of a resolution to dissolve and commence the liquidation of the company will result in two tax years within the calendar year 2023. As regards the second question, the position taken was that the company would be entitled to apply preferential PIT settlement for general partners in accordance with the rules set out in Article 41(4e) in conjunction with Article 30a(1)(4) and in conjunction with Article 30a(6a) of the PIT Act.

The Director of the National Tax Information Service (KIS) agreed with the company, stating that its position on both issues was correct.

With regard to the first question, the KIS stated that, following the adoption of a resolution on the dissolution and liquidation of the company, it would be obliged to close its accounts as at the day preceding the commencement of liquidation; consequently, in the calendar year 2023, there would be two tax years within a single financial year.

Furthermore, the Director of the National Tax Information Service pointed out that the provision of Article 30a(6a) of the PIT Act takes into account the relationship between the income (profit) earned by the company in a given tax year and the partners’ income from their share in the company’s profit for that tax year. The legislator has structured this entitlement by taking into account a ‘model’ profit distribution system, i.e. the following sequence of events:

• during the year, the company generates income which is subject to income tax,
• at the end of the financial year and the tax year, the company determines its profit and calculates the income tax due for that tax year,
• once the results for the financial year have been determined, the company decides on the distribution of profits for that year,
• the distribution of profits for the year ‘results’ from the income (profits) earned for that year.

In accordance with the above, the company will be entitled to apply preferential personal income tax settlement, as, when making a profit distribution payment to a general partner, it will be able to reduce the flat-rate income tax due on that payment by an amount equal to the product of each general partner’s percentage share in the company’s profit and the tax due on the company’s income for the tax year falling within the period of the tax year, which will end in connection with the adoption of a resolution to dissolve the company and commence its liquidation.

It should be emphasised that the manner of applying this preference in PIT settlement is a matter of divergence in the positions of the Director of the National Tax Information Service (KIS) and the administrative courts.

The tax authorities argue that the payment of an advance against the share in profits is subject to current taxation and that the company is obliged to pay the personal income tax due on behalf of the general partner (see, for example, the individual interpretation of the Director of the National Tax Information Service dated 4 April 2022, ref. no. 0113-KDIPT2-3.4011.1188.2021.1.RR). However, administrative courts take a different view, stating that PIT should be calculated and paid only after the end of the tax year, i.e. at a time when the amount of CIT against which PIT could be offset is known (see, for example, the judgment of the Supreme Administrative Court of 3 December 2020, ref. no. II FSK 2048/18).

If you have any questions regarding the tax office or issues such as the tax year or the closing of the tax year, please contact HWW Hewelt Wojnowski Lindner i Wspólnicy.