FROM COURT DOCKET

The sale of all rights and obligations of a partner of a private partnership is subject to taxation as revenue from property rights. It corresponds to the price specified in a sale agreement.

Thus ruled the Province Administrative Court in Szczecin on 10 August 2016 (I SA/Sz 493/16).

Facts of the case

In November 2015 a taxpayer filed an application for an interpretation of the Personal Income Tax Act with regard to, among other things, determining the revenue on account of a non-gratuitous sale of all participating rights in a private partnership. He explained that he was conducting business activity which involved granting loans to private individuals according to rules specified in the Consumer Credit Act. In connection with the amended Consumer Credit Act entering into force on 11 March 2016, which introduces the requirement to conduct such activities by companies, he would not continue to run the firm. However, he noticed that after ceasing to grant loans to consumers, he would be entitled to debts arising from the previously concluded agreements. He was therefore considering setting up a private (limited or general) partnership in order to pursue activities involving collecting debts arising from loan agreements which he concluded with consumers as part of the business activity conducted as a private individual. He would contribute the debts to the newly established private partnership. The capital involved in granting loans is not counted as costs by him. The debts from loan agreements terminated before the day they were contributed towards the private partnership would be valued on the basis of a collection probability assessment. Because the activity of the private partnership is to be episodic in character and would boil down to collecting debts, the taxpayer assumes that in the future he can sell all participating rights to which he is entitled in a private (general or limited) partnership. He asked whether the revenue on account of a non-gratuitous sale of all participating rights in a private partnership was equal to the price determined in the agreement with the purchaser, minus the costs of sale. His opinion was that this was the case. However, the tax authorities replied that dues received by or placed at the disposal of a taxpayer for selling all rights and obligations in a private (general or limited) partnership would be subject to taxation with personal income tax as revenue from property rights. That revenue would correspond to the price specified in the sale agreement.

Resolution of the matter

The Province Administrative Court in Szczecin also failed to grant that the appellant was right. In its assessment, the tax authorities had correctly maintained that participation in a private (general or limited) partnership must be classed as property rights, bound up with membership in that partnership. According to the Province Administrative Court, any revenue having a property right as its direct source constitutes revenue from property rights, even if that right has not been clearly indicated in a parliamentary act. This is not affected by the fact that in tax law the revenue of partners from participation in a private partnership conducting business activity is regarded as revenue from those activities. The court did not agree that the institution of the transfer of all rights and obligations of a partner of a private partnership should be treated identically to his leaving that partnership. Consequently the court was in no doubt that the appellant’s sale of all rights and obligations of a partner of a private partnership would be subject to personal income tax as revenue from property rights. That revenue would correspond to the price specified in the sale agreement. The difference between the amount obtained from selling all rights and obligations and the value of the contribution to the partnership specified in the notarial deed would be income subject to taxation. The income from that source would be subject to accumulation with income from other sources, taxed according to “general rules”, i.e. according to scale, which was obtained during the tax year.

EXPERT’S OPINION

Marta Ignasiak, tax advisor at FKA Furtek Komosa Aleksandrowicz:

The dispute, which was resolved by the ruling discussed, was about establishing whether revenue from the non-gratuitous sale of all participating rights in a private partnership must be classed as revenue from the sale of a property right, or from conducting non-agricultural business activity. It is true that the applicant’s question concerned the source of the revenue and the manner of determining it, but this could have an actual influence on the tax rate applied. It follows from the regulations that one can only speak of revenue from business activity if it will not be counted among other categories of sources of revenue referred to in Article 10 of the Personal Income Tax Act. In my opinion, that proviso should not be understood to mean the necessity of automatic exclusion, from the income achieved within a private partnership, of each benefit mentioned in that provision, e.g. revenue from lease, revenue from financial operations and revenue from the non-gratuitous sale of property, if it is connected with the activity conducted. Nevertheless, in this case one must distinguish between revenue from the sale of property rights which is achieved via the partnership in performing business activity (e.g. obtained in connection with the partnership selling debts from loans), and revenue from the partner’s sale of all participating rights in that partnership. In that respect one must agree with the court that the latter revenue must be taxed differently from income achieved from business activities. That revenue is connected with the person of the partner, and not with the partnership, and has no connection to the business activities conducted via that partnership. The sale of rights in a private partnership should therefore be classed as the source being “monetary capital and property rights, including non-gratuitous sale of property rights”.