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Time to Tax Shareholders of Joint Stock Partnerships Says Finance Minister
The Minister of Finance recently issued a general interpretation, which states that revenue of a shareholder of a Joint-Stock Partnership (SKA) is due on the day of general meeting's resolution concerning dividend payment or on the dividend day (upon distribution of dividends to shareholders). This interpretation is favourable for SKA shareholders. For the time being it should be treated as resolving the issues regarding the timing of receiving revenue and the source of revenue, both of which have been subject to long-running disputes between the tax administration and taxpayers. Taxand Poland discusses the future of joint-stock partnerships and their tax liability.
A SKA is transparent for tax purposes, which means that its partners are subject to taxation, and not the partnership itself. Until now, there has been uncertainty regarding when the income generated by a SKA should be taxable at the level of the shareholders. The Supreme Administrative Court (SAC) stated that taxable revenues arise at the moment of actual receipt of cash or monetary benefits.
On 11 May 2012, the Minister of Finance issued a general interpretation concerning taxable income of a shareholder of a SKA. According to this ruling, a shareholder shall recognise taxable revenue (both for Personal Income Tax (PIT) and Corporate Income Tax (CIT) purposes) no earlier than on the day of the general meeting's resolution concerning dividend payment or on the dividend day (if such a day) is determined. This revenue should be treated as revenue derived from business activity (which is particularly important from a PIT perspective).
This interpretation is not fully compatible with the SAC resolution, which does not qualify SKA's revenues as resulting from business activity. Nevertheless, in both cases the conclusions are similar, with regards to the moment of taxable income recognition.
The interpretation is favourable for SKA's shareholders. As long as dividends are not paid out, there is no basis for income taxation. This effectively allows shareholders to postpone taxation of income generated by the SKA until profit distribution. The described method confirmed earlier in the SAC resolution should contribute to determination (and unification) of the position of tax authorities and administrative courts regarding the discussed issues.
This general interpretation should be taken into consideration by taxpayers who aim to carry future business activities in the form of a SKA or to transform a capital company into a Joint Stock Partnership agreement. Postponing taxation may be used to optimise business tax settlements - ie, shareholder's profits can be reinvested without a tax obligation until a decision is made about the payment.
On the other hand the interpretation lacks clarity regarding the tax position of foreign SKA shareholders. The Minister of Finance's opinion appears to be that dividends from SKA constitutes revenue from business activity. On the contrary, the SAC in the resolution stated that that holding of shares and deriving income from distribution of profit of joint-stock partnership does not constitute a business activity conducted by a shareholder who is a legal person. As this significantly influences the treatment of such revenue under the Double Tax Treaty, the position of administrative courts and tax authorities should be monitored in this respect. Multinationals should assess their positions in light of this interpretation to understand the advantages reinvesting shareholder profits can bring.
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