Conversion of a limited partnership into a LLC and Estonian CIT

Protective opinion regarding the restructuring and transformation of a limited partnership into a limited liability company, as well as its taxation under Estonian CIT approach

On January 22, 2024, a statement was issued regarding the release by the Head of the National Tax Administration (KAS) of a protective opinion dated November 29, 2023, concerning the process of a partner withdrawing from a limited partnership and transforming it into a limited liability company, opting for taxation under the flat-rate income tax for companies (Ref. DKP1.8082.2.2023).

The subject of the opinion were actions including:

withdrawal by the limited liability company from the limited partnership without remuneration, while changing the function of one of the existing general partners to a limited partner (which is necessary for the company to adopt the Estonian model)
determining a new distribution of profits and losses in the company
transforming the limited partnership into a limited liability company
introduction of the company into the Estonian model.

Changing to the Estonian model means that from a tax perspective, the general partner and the limited partner are taxed equally, unlike under the “traditional” CIT, where general partners may benefit from a more advantageous taxable deduction than limited partners. Consequently, the utilization of this form of business loses its purpose if one of the partners could bear full liability for the company’s obligations without achieving tax benefits.

The company in which the reorganization was planned indicated that the aim was to achieve greater flexibility in selecting individuals to manage the company – after the transformation, qualified specialists would be able to manage the company without becoming partners. The reorganization also aimed to reduce the business risk associated with the legal form of a limited liability company. There is no doubt that one of the main goals of these actions taken was to achieve tax benefits.

The Head of KAS concluded that despite obtaining tax benefits from the restructuring, the method employed is neither artificial nor contradicts the purpose or objective of the law.

Such a position from the tax authority is undoubtedly advantageous for many taxpayers considering conducting a reorganization of their business activities to benefit from the flat-rate income tax for companies.

If you have any further questions or require additional information, please contact your business relationship person or use the enquiry form on the HLB Poland website.

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