Transformations of commercial companies are becoming an increasingly common practice in Polish business, especially when business owners want to optimise the legal form of their business. One of the most complex issues in this process is the taxation of distributions of profit generated by the company before the transformation. The problem arises in particular when a company that is not a CIT (corporate income tax) taxpayer is transformed into an entity that must pay this tax.
The issue becomes especially important when a general partnership (spółka jawna) is transformed into a limited partnership (spółka komandytowa), where not only the legal form changes but also the way the business is taxed. Partners and tax advisers often wonder whether profits generated before the transformation keep their tax-neutral character or are taxed as income from a share in the profits of a legal person.
Transforming a general partnership into a limited partnership means moving from PIT (personal income tax) at the level of the partners to CIT at the level of the company. This fundamental change raises questions about the legal and tax nature of profits generated before the transformation
Current case law of the administrative courts and rulings of the tax authorities show the need to analyse in detail when the obligation to pay out the profit arose and what the legal nature of the payment is. The key is to establish whether the payment concerns profits generated by the general partnership or profits that arose after the transformation into a CIT taxpayer.
Legal basis for transforming commercial companies
The transformation of commercial companies is regulated in detail in the Commercial Companies Code (KSH). Under Article 551 § 1 KSH, a wide range of entities can be transformed: a general partnership, a professional partnership, a limited partnership, a limited joint-stock partnership, a sp. z o.o. (limited liability company), a simple joint-stock company and a joint-stock company.
In a transformation, the company being transformed can be converted into another commercial company, referred to as the transformed company. The legal moment of the transformation is set out precisely in Article 552 KSH: the company being transformed becomes the transformed company when the transformed company is entered in the register. This day is called the transformation date, and the registry court deletes the company being transformed from the register ex officio.
The transformation date is crucial for determining when the company's tax status changes. From that day, the transformed company becomes a CIT taxpayer if it did not have that status before
Particularly important for tax matters is Article 553 § 1 KSH, which provides that the transformed company has all the rights and obligations of the company being transformed. This universal succession means that the new legal form takes over all legal relationships of its predecessor, which has direct consequences for tax matters.
The Tax Ordinance Act (Ordynacja podatkowa) further specifies the effects of a transformation in tax law. Article 93a § 1 of the Tax Ordinance Act clearly states that a legal person formed as a result of the transformation of another legal person or of a company without legal personality takes over all the rights and obligations of the transformed person or company provided for in tax law. For a commercial partnership (e.g. a limited partnership) formed by transforming another company without legal personality, this provision applies accordingly (Article 93a § 2(1)(a) of the Tax Ordinance Act).
- Preparing the legal documentation for the transformation
- Adoption of the transformation resolution by the partners
- Drawing up a list of assets and closing the books of the general partnership on the day before the transformation date (Article 24(3g) of the PIT Act)
- Filing the application to enter the transformed company in the register
- Obtaining the entry in the register and automatic deletion of the company being transformed
This succession means that specific rights and obligations pass from one entity to another. In tax law, this is a derivative acquisition of rights, where the legal successor acquires the rights and obligations of its predecessor. This means continuity of tax liabilities and entitlements despite the change of legal form.
A transformation does not result in the liquidation of the entity or the creation of a new business entity. It is a change of legal form while keeping the continuity of the business and of legal relationships
On the transformation date, the partners of the general partnership become partners of the transformed company (Article 553 § 3 KSH), and their rights to its assets are expressed in shares (in a capital company) or in the totality of the partner's rights and obligations (in a limited partnership). This transformation means that the partners of the general partnership, instead of being owners of the assets used in the business run as a general partnership, become entitled to the assets of the transformed company to the extent of their shares. Moving assets between related entities also raises PCC questions — we discuss them in our article on asset transfers between related parties and PCC tax.
Taxation of a general partnership before the transformation
A general partnership whose partners are only natural persons has a special tax status. Under the applicable rules, such a partnership is not an income tax taxpayer – its partners are the PIT taxpayers, which is a fundamental difference compared with companies that are legal persons. This difference is key to understanding how profits are taxed after the transformation.
Under Article 5b(2) of the Personal Income Tax Act, the obligation to settle the tax rests directly on the partners, who are treated as persons running a business. Each partner of a general partnership settles PIT in proportion to their right to a share in the partnership's profit (Article 8(1) of the PIT Act), which means that taxation takes place at the level of the partners, not at the level of the partnership itself. We keep accounting books for general partnerships, limited partnerships and sp. z o.o. companies as part of our accounting services.
In a general partnership, the partners are the PIT taxpayers, not the partnership itself. Each partner settles the tax in proportion to their share in the profit, which means that the partnership's profit is already taxed at the level of the partners
This tax mechanism has direct consequences for the nature of profit distributions from a general partnership. A distribution of profit from a general partnership is undoubtedly a case of the partner receiving a financial benefit – a specific amount of money is transferred from the partnership's assets to the partner's assets. However, because the profit earned by the general partnership is the result of its business, and this business is taxed on an ongoing basis at the level of the partners, a distribution of profit from a company that is not a legal person is treated as tax-neutral under the Personal Income Tax Act.
This tax neutrality results from the fact that the profit was already taxed when the partnership generated it, and the partners paid PIT on it. Taxing the same amount again at the time of distribution would lead to unacceptable double taxation, which is contrary to the principles of the tax system.
| Type of company | Tax status | Taxpayer | Time of taxation | Nature of the distribution |
|---|---|---|---|---|
| General partnership | Transparent (partners who are natural persons pay PIT) | Partners | When the profit is generated | Tax-neutral |
| Limited partnership | CIT taxpayer (since 2021) | Company (CIT), partner on distribution (PIT) | Company income and profit distribution | Income from capital |
| Sp. z o.o. | CIT taxpayer | Company (CIT), partner on distribution (PIT) | Company income and profit distribution | Income from capital |
For the further analysis, it is key that profits generated by a general partnership keep their legal character also after the transformation. Transforming a general partnership into a company that is a corporate income tax taxpayer means legal succession between entities, and the transformed company is not a new entity starting a business but a continuation of the business run as a general partnership in a changed legal form.
Income generated while running the business as the company being transformed as a rule becomes the profit of the transformed company. However, the legal character of this profit remains unchanged
Tax consequences of a profit distribution after the transformation
After a general partnership is transformed into a limited partnership, a fundamental question arises about the tax character of distributions of profits generated before the transformation. This issue requires a detailed analysis of the rules on taxing income from a share in the profits of legal persons.
As a result, income received by the partners of the transformed company from a share in profits generated by that company after it obtained CIT taxpayer status is subject to personal income tax in the same way as income from a share in the profits of legal persons. This change of tax status has significant consequences for how future profits are taxed. CIT taxpayer status also changes how other expenses are assessed, for example expenses for board members as tax-deductible costs.
Under Article 24(5) of the Personal Income Tax Act, income or revenue from a share in the profits of legal persons is the income or revenue actually received from that share. Income actually received means income that the taxpayer can dispose of, i.e. income actually paid out or made available to them.
The key for taxation is to determine whether the profit paid out was actually generated by a company that is a CIT taxpayer or by the general partnership before the transformation. This classification determines how the payment is taxed
This type of income is classified as income from capital under Article 10(1)(7) of the Personal Income Tax Act and, under Article 30a(1)(4) of the PIT Act, it is subject to 19% PIT, which is collected by the company acting as the tax remitter.
Income or revenue from a share in the profits of legal persons is the income or revenue actually received from that share that meets two basic conditions:
- it results from holding the right to a share in the profits of legal persons
- it was actually received by the entitled person
Practical example: The general partnership "ABC" generated a profit of PLN 500,000 in 2023, which was taxed with PIT at the level of the partners. In January 2024, the partnership was transformed into a limited partnership. In March 2024, the new limited partnership paid the partners the profit for 2023. The question is whether this payment is taxed as income from a share in the profits of a legal person.
Tax authority rulings and court case law
The taxation of profit distributions after a company transformation has been the subject of detailed rulings by the tax authorities and of case law of the administrative courts. These positions are of key importance for business practice and tax planning.
Adopting an effective resolution on the division and distribution of profits before the transformation means that the general partnership has an obligation towards the partners to pay these amounts. As a result, the amounts paid by the limited partnership formed by the transformation will in fact be a distribution of profits from the general partnership within the meaning of the Commercial Companies Code.
The time when the profit distribution resolution is adopted is crucial for determining the tax character of the payment. If the resolution was adopted before the transformation, the obligation arises on the side of the general partnership
The Director of the National Tax Information (KIS) stated in an individual tax ruling of 5 April 2024 (no. 0113-KDIPT2-3.4011.19.2024.2.KKA) that such a distribution of profits will not be income of the partners from a share in the profits of a legal person within the meaning of the Personal Income Tax Act. The reason is that the payment will settle an obligation that arose on the side of the general partnership before its transformation into a limited partnership.
As a result, the limited partnership formed by transforming the general partnership will not have to collect tax as a remitter, because no such tax arises at all. This position is of great practical importance for transformed companies, although an individual tax ruling protects only the entity that obtained it (Article 14k § 1 of the Tax Ordinance Act).
The administrative courts also take this favourable position on the neutrality of profit distributions after a transformation into a CIT taxpayer. In its judgment of 14 February 2023 (I SA/Rz 743/22), concerning the transformation of a limited partnership into a sp. z o.o., the Voivodeship Administrative Court (WSA) in Rzeszów stated that profits generated by the partners did not become profits of a legal person when the company was transformed into a CIT taxpayer. In its judgment of 12 February 2026 (II FSK 661/23), the Supreme Administrative Court (NSA) dismissed the authority's cassation appeal against that judgment. The tax on the company's own profits depends on the current CIT rates.
Case law of the administrative courts confirms that profits generated before the transformation keep their original legal and tax character if they have been separately identified in the books. They do not automatically become profits of a legal person upon the transformation
The court stressed that a distribution of undistributed profits should be tax-neutral for the partner regardless of when it takes place – before or after the transformation. The Voivodeship Administrative Court (WSA) in Bydgoszcz took a similar position in its judgment of 10 October 2023 (I SA/Bd 349/23), stating that undistributed profits of a general partnership do not lose their character and do not become profits of the limited liability company upon the transformation. In both cases the courts set aside rulings of the Director of KIS that were unfavourable to the taxpayers, and the NSA stressed in judgment II FSK 661/23 that the condition is that these profits are separately identified in the books in a way that makes it possible to establish which part of the transformed company's capital comes from them.
- Profits generated by the general partnership remain tax-neutral
- The time when the distribution resolution is adopted determines the nature of the obligation
- As a rule, the transformed company does not have to collect tax on such payments
- Case law confirms the neutrality of such payments, although the tax authorities took a different position in some rulings
- No double taxation of the same profit
Practical aspects of settling a profit distribution
Applying the rules on profit distribution after a company transformation in practice requires particular attention to the procedures and documentation accompanying these operations. Properly documenting the nature of the payment is key to avoiding problems with the tax authorities.
Profit amounts generated and taxed in the business run by the partners of the general partnership are not taxed as income from profit from a share in the transformed company. This principle is of fundamental importance for tax planning and must be properly documented in the company's accounting books.
Transformed companies should keep detailed records of profits generated before and after the transformation. This allows payments to be settled correctly for tax purposes and helps to avoid interpretation problems
In summary, if a general partnership earned a profit that is later paid out by the limited partnership formed by the transformation, the limited partnership as a rule has no obligation to collect tax, because such a payment is tax-neutral. This profit was already taxed in the business run by the partners of the general partnership before the transformation.
To ensure correct tax settlement, companies should follow these documentation rules:
- Keeping separate records of profits generated before the transformation
- Documenting profit distribution resolutions with the dates they were adopted
- Marking the nature of the amounts paid out in the accounting documents
- Keeping documentation confirming that the profit was taxed before the transformation
- Preparing accounting notes explaining the nature of the operation
Example of documentation: The limited partnership "XYZ" sp. k., formed by the transformation of a general partnership, pays out in 2024 the profit generated in 2023. The accounting documentation should include the note: "Distribution of profit for 2023 generated by the general partnership before the transformation, taxed with PIT at the level of the partners – tax-neutral payment in line with KIS ruling no. 0113-KDIPT2-3.4011.19.2024.2.KKA".
Pay particular attention to situations where the transformed company also generates its own profits after the transformation. In such cases, a precise distinction must be made between "old" profits (tax-neutral) and "new" profits (taxed under the general rules).
Mixing profits generated before and after the transformation can lead to errors in tax settlements. Separate records must be kept and the source of the amounts paid out must be marked precisely
