A payout of funds by a general partnership for the benefit of a shareholder in an amount of part of the value of that shareholder’s contribution does not constitute revenue for that shareholder.

Thus ruled the Provincial Administrative Court in Gliwice on 19 May 2016 (I SA/Gl 86/16). Facts of the case.  In July 2015 a taxpayer applied for an interpretation of the provisions of the PIT Act.  She explained that she was a Polish tax resident and PIT taxpayer.  In the future, she was to become a shareholder in a general partnership with its registered office in Poland resulting from the transformation of a limited joint stock partnership. The general partnership agreement will permit a reduction in the share capital of individual shareholders upon the consent of the other shareholders.  The taxpayer explained that during the activities of the general partnership a situation may arise in which, after gaining the consent of the other shareholders, she will reduce her share capital pursuant to Article 54 par. 1 of the Commercial Companies Code. The reduction will involve the general partnership paying out funds in an amount corresponding to part of the value of the applicant’s contribution to the general partnership. Such a reduction may be repeated or take place periodically. The total value of the amounts paid out will be lower than the value of her contribution as set forth in the partnership agreement. The taxpayer asked whether the funds paid out by the general partnership as a reduction in her share capital will constitute revenue for her. In her opinion, this should not be the case. The tax authority held a different view. In its assessment, obtaining funds from the general partnership from a reduction in her contribution constitutes revenue subject to taxation. This would be revenue as defined in Article 10 par. 1 pt. 7 of the PIT Act, that is, revenue from property rights. The tax authority pointed out only that, in connection with the funds received by the applicant being deemed revenue from property rights, for tax purposes she would enjoy the right to reduce the value of that revenue by the costs of earning it, that is, by the outlays actually incurred in acquiring that withdrawn part of the contribution to the general partnership which meets the prerequisites of Article 22 par. 1 of the PIT Act. The taxpayer complained against that interpretation, and won the case. The Provincial Administrative Court in Gliwice held that, in the meaning of Article 5a pt. 26 of the PIT Act, a general partnership is not a legal entity. The return to a shareholder in a general partnership of part of their contribution or the cash equivalent thereof does not affect that shareholder’s right to participate in profit. As a benefit governed by separate legal title, a reduction in share capital is not regulated by Article 8 par. 1 of the PIT Act. In turn, Article 14 par. 2 pt. 16 of the PIT Act only sets forth tax consequences of a shareholder withdrawing from a company which is not a legal entity. A reduction in the share capital of a shareholder in a general partnership, however, does not constitute a withdrawal from that general partnership. The court agreed with the plaintiff that a payment of funds by a general partnership for the benefit of a shareholder from a reduction in share capital does not constitute revenue for that shareholder in the meaning of Article 11 par. 1 of the PIT Act. Funds paid out from a reduction in share capital does not cause an augmentation of the shareholder’s property as referred to in that provision. A shareholder in a general partnership in this way recovers part of the property previously contributed to the partnership. The court did not accept the position of the tax authority that the receipt of funds by the plaintiff from a reduction in her contribution to the general partnership constituted revenue on her part from property rights. The PIT Act does not contain any provisions providing grounds for taxing funds paid out by a general partnership to a shareholder from a reduction in share capital. The tax consequences of a reduction in the share capital of a shareholder in a general partnership are not regulated by that Act. The court also referred to the content of Article 24 par. 3c of the PIT Act. Under that provision, where funds are obtained by a shareholder who withdraws from a company which is not a legal entity, income arises where there is a difference between the revenue received and the outlays incurred in acquiring or taking up the rights to those shares in the company.

EXPERT OPINION

Marta Ignasiak, tax advisor at FKA Furtek Komosa Aleksandrowicz

The ruling discussed touches on the issue of taxing funds paid out to partners of partnerships from a reduction in the share capital in those companies. Case law is quite plain on such matters, and confirms the absence of a basis for such taxation, primarily because no regulation expressly deems such payments as taxable revenue. One must agree with the court that the legislator’s silence in respect of reductions in share capital in partnerships should be understood as the absence of any intention to tax such benefits. Given that a partnership is not an autonomous taxpayer, and that the income it obtains is taxed at the level of the shareholder (regardless of whether that income is at their direct disposal), the payment to a shareholder of funds from the assets of a company should not, in principle, entail any enrichment on their part. An exception is a situation where an act of law stipulates otherwise (such as in the case of a withdrawal of a shareholder from a company, where income therefrom should be recognised). Given the absence of any regulations directly concerning a reduction in share capital, one cannot rule out that, in the future, case law may change to recognise the justifiability of applying general provisions. For this reason, disputes over taxation in cases of a reduction in share capital in a partnership are not likely to disappear altogether very soon.