When changing the legal form, does the new company assume the rights and tax obligations of the old one? This will be the case when transforming a general partnership into a limited liability company.
Partnerships are transformed into capital companies not only to grow the business, but to gain credibility with contractors. The reason may also be the need to limit the liability of partners for the company's obligations to the amount of shares contributed.

Succession of rights and obligations

With the transformation, the company continues to operate, only that in a changed legal form. Article 553 of the Commercial Companies Code (CCC) states that the converted company is entitled to all the rights and obligations of the converted company. However, from the point of view of commercial law, in the case of transformation, one cannot speak of general succession, but only of continuation. Differently, the rules for the transfer of rights and obligations of transformed companies are defined by the provisions of the Tax Ordinance (op). It follows from Article 93a(1)(2) of the op that a legal entity created as a result of the transformation of a non-corporate company enters into all the rights and obligations of the transformed company provided for in the tax law.

Assets and share capital

The assets of the transformed general partnership become the assets of the limited liability company as of the date of transformation. The resolution on transformation should indicate the amount of share capital of the limited liability company. (not less than PLN 50 thousand), taking into account the value of the assets of the general partnership. Of course, it is not necessary that the amount of share capital be the same as the value of the general partnership's assets. When the value of the capital will be less than the value of the company's assets, the remaining part of the assets should be allocated to the reserve capital of the limited liability company.
Some taxpayers have doubts about how to treat the assets of a converted partnership. For tax purposes, one must assume that the assets of a general partnership are in-kind contributions in the form of an enterprise contributed to a limited liability company. Thus, the shares in the limited liability company will be acquired for a contribution in kind (in-kind contribution) in the form of an enterprise or an organized part thereof.

Income at shareholders

The partners of the general partnership participating in the transformation become shareholders of the limited liability company as of the date of transformation. The source of income for the shareholders will be the income resulting from the acquisition of shares in the transformed limited liability company in exchange for the contribution made. Article 17 paragraph 1 item 9 of the Personal Income Tax Act (PIT Act) will apply to its taxation. This provision states that income from monetary capitals is the nominal value of shares in an incorporated company taken in exchange for an in-kind contribution in a form other than an enterprise or an organized part thereof.
When the transformed general partnership has the characteristics of an enterprise within the meaning of Article 551 of the Civil Code, the income from the acquisition of shares will be exempt from personal income tax under Article 21(1)(109) of the PIT Law. According to it, the nominal value of the shares in the incorporated company - taken up in exchange for an in-kind contribution in the form of an enterprise or an organized part thereof - is exempt from income tax.

You sell, you have income

In the case of partners, taxable income will arise only on the disposal of shares received in a limited liability company formed as a result of the transformation of a general partnership. Pursuant to Article 17(1)(6)(a) of the PIT Law, income from cash capitals is considered to be income from the paid disposal of shares in incorporated companies. Since income from a source of income is the surplus of the sum of income from that source over the costs of obtaining such income achieved in the tax year, when disposing of shares against payment, the costs are determined in the manner specified in Article 22 paragraph 1f item 2 of the PIT Law. This provision states that in the case of a paid disposal of shares in a company taken up in exchange for a contribution in kind, as of the date of disposal of such shares, the cost of revenue is determined in the amount of the value of the enterprise or its organized part, as shown in the books of the enterprise, determined as of the date of acquisition of such shares, but not higher than their nominal value as of the date of acquisition. Income from the disposal of shares is subject to 19% income tax.
Shares acquired in exchange for a contribution in kind in the form of a business or an organized part thereof are exempt from taxation
When the partners of a converted general partnership are legal entities, then, as in the case of individuals, taxable income will arise only when the shares of the limited liability company are sold.

Accounting for the return of contributions

If a partner of a general partnership does not wish to continue participating in a transformed limited liability company, he has a claim for payment of an amount corresponding to the value of his contributions to the transformed company, according to the financial statements prepared for the purposes of the transformation. This shareholder may, pursuant to Article 21(1)(50) of the PIT Law, benefit from tax exemption of income received in connection with the return of contributions. The exemption applies up to the amount of the contributions made. Thus, only the income constituting the difference between the income received in connection with the return of the contributions held and the costs incurred for the acquisition of the contributions will be taxed.

Recordkeeping duties

The limited liability company opens its books of accounts as of the date of entry of the transformation in the National Court Register. As of the date the books of accounts are opened in the converted limited liability company, the fiscal year begins. A general partnership of individuals, if its net income for the previous fiscal year was not at least 800 thousand euros, could use a tax ledger. Upon conversion to a limited liability company, it will be required to keep only books of accounts.

Revenues and expenses

Until the date of conversion, a general partnership is required to recognize all business events that relate to its operations in its books. Upon conversion, the obligation to recognize economic events in the books is transferred to the limited liability company. How to allocate revenues and expenses at individual companies? The Tax Chamber of Krakow in its interpretation of November 28, 2003 (PD-1/005/2-342/03/WK) stated that: "in order to correctly determine taxable income in a general partnership and in a limited liability company, it is necessary to allocate revenues and expenses related to operations occurring in the month of conversion as follows.

• operations documented by third-party receipts for the purchase of tangible assets and services and cash turnover should be qualified according to the date they were made, and operations for fixed services, such as energy supplies, should be accounted for in proportion to the number of working days in the month of registration of the limited liability company,
• operations documented by own evidence (e.g., sales invoices, cash operations) should be qualified according to the date of the operation, and business expenses, such as depreciation, salaries, should be accounted for by key, in proportion to the number of working days in the month of registration of the company,
• adjustments to erroneously determined revenue and deductible expenses should be referred to the period to which they relate,
• discounts, rebates - in accordance with the general rules - reduce income in the month they are granted."

It is worth remembering that a transformed limited liability company is not allowed to take into account the losses of the partners of a general partnership.

Initial value of fixed assets

A limited liability company formed as a result of the transformation of a general partnership should establish the initial value of tangible and intangible assets at the amount specified in the records of tangible and intangible assets of the general partnership. It shall make depreciation deductions taking into account their previous amount. It shall also continue the depreciation method adopted by the general partnership.

TIN will not change

According to Article 12 (1) of the Law on Rules for Registration and Identification of Taxpayers, the TIN assigned to a taxpayer is not transferred to a legal successor, except in the case of the transformation of a civil partnership into a commercial company or a commercial company into another commercial company. Thus, in the case of the transformation of a general partnership into a limited liability company. NIP remains unchanged.

What happens to VAT when you change legal form

The conversion of a general partnership into a limited liability company is not the liquidation of a partnership. Therefore, Article 14 of the VAT Law on taxation upon liquidation of the company's activities will not apply. On the other hand, the limited liability company will have the right to reduce output tax by input tax to the extent that this right was enjoyed by the transformed company.
A limited liability company resulting from the transformation of a general partnership is not required to file a VAT-R registration form. However, it will have to file an update of the data contained in the VAT-R form (without re-registering for VAT purposes). She should do so within seven days, counting from the date on which the change occurred. This follows from the wording of Article 96(12) of the VAT Law.

No tax on inventory

When transforming a general partnership into a limited liability company, we are not dealing with the liquidation of the transformed company, but with a process involving a change in the legal form of the business. There is no dissolution and liquidation of the company. From the point of view of tax law, this transformation is not the same as the liquidation of business activity within the meaning of Article 24(3) of the PIT Law. The existing business activities of the general partnership continue with the use of the same assets by the limited liability company. Therefore, the conversion does not result in the obligation to pay flat income tax on the income from the liquidation inventory.