One of the conditions for qualifying for the Estonian CIT (Corporate Income Tax) is not to have shares in the capital of another company. However, under Luxembourg law, there is a special limited partnership to which one of the Polish companies has joined, arguing that participation in such a company does not deprive the right to the Estonian CIT.
What does the Estonian CIT require?
Article 28j paragraph 1 point 5 of the Corporate Income Tax Act clearly stipulates that one of the conditions for a company to use lump-sum taxation of company income (the so-called Estonian CIT) is not to have shares (stock) in the capital of another company, or shares in an investment fund or in an investment institution, the whole of rights and obligations in a company that is not a legal entity, and other proprietary rights related to the right to receive benefits as a founder or beneficiary of a foundation, trust or other entity or legal relationship of a fiduciary nature. Therefore, having shares in the capital of another company or the entirety of rights in a company that is not a legal entity means losing the right to further settle taxes with the tax office in a preferential form of taxation, which is the Estonian CIT for entrepreneurs.
Foreign company of special limited partnership type
One of the Polish companies, settling its tax via the lump sum on company income, decided to contribute a property in-kind to a foreign company of special limited partnership. According to Luxembourg law, the Société en Commandite Spéciale (SCSp) is a special limited partnership formed based on a partnership agreement that sets the company’s terms. The SCSp agreement is concluded for a definite or indefinite period by one or more general partners (associés commandités) with unlimited, joint liability for the company’s obligations, with one or several limited partners (associés commanditaires) who only commit to a pre-determined number of shares in the company, represented or not by securities, as provided for in the company’s agreement.
The profit from a foreign company and the Estonian CIT
The company indicated that the SCSp does not have legal personality. The partners, not the company, are the income tax payers. The Polish entrepreneur will have a “partnership interest” which are not shares, nor stock in the company’s capital, and neither do they constitute the entirety of rights and obligations in a company that is not a legal entity, nor other property rights as mentioned in the article 28j paragraph 1 point 5 of the CIT law. The entrepreneur will be a limited partner (limited partner). Therefore, the Polish company submitted to the tax authority a request to confirm that its partnership status and participation in the profits of the Luxembourg SCSp will not deprive it of the right to continue to settle with the Estonian CIT.
Tax authority avoided answering
However, the Director of National Revenue Information did not respond. He refused to issue an interpretation, explaining that despite the entrepreneur’s assurances that he will not possess the entirety of rights in the Luxembourg company, these declarations should be confirmed, for which it would be necessary to analyse the provisions regulating the status of a foreign Société en Commandite Spéciale type of company. However, the Polish tax authority is not authorised to carry out such an analysis. This issue is not regulated by tax law within the meaning of the Tax Ordinance Act. As provided for in article 3 point 2 of the Act, the catalog of such regulations includes: the provisions of tax laws, the provisions of international tax agreements ratified by Poland, and the provisions of executive acts issued under tax laws.
The court ruled in favour of the company
The entrepreneur appealed the authority’s decision. The Voivodship Administrative Court in Poznan ruled that the company clearly and unambiguously described the implications of it having a partnership interest in a foreign special limited partnership type of company. The company precisely explained and demonstrated that this does not entail possessing the whole of rights and obligations in a company that does not have the status of a legal entity, or other property rights as specified in Article 28j paragraph 1 point 5 of the CIT law. These explanations are binding on the tax authority (judgment of June 11, 2024, case file no. I SA/Po 264/24).
Summary
If tax authorities are unable to show that entrepreneurs owning ownership interests of the type partnership interest in a Luxembourg special limited partnership Société en Commandite Spéciale is associated with possessing asset rights under Article 28j paragraph 1 point 5 of the CIT law, this would be an interesting business option for Polish companies wishing to expand their activities, draw profits from a foreign company without simultaneously losing the right to the Estonian CIT.
Author: Robert Nogacki, lawyer, managing partner, Skarbiec Law Firm, specializing in legal, tax and strategic consulting for entrepreneurs.
Source: https://managerplus.pl/udzial-w-zagranicznej-spolce-wyklucza-estonski-cit-niekoniecznie-45895
