Partial Return of Capital Contributions from Polish Partnerships
Introduction
Entrepreneurs frequently elect to conduct business operations through partnership structures. To enable such partnerships to function, partners contribute various forms of capital—both monetary and in-kind. A significant number of partners, having established successful operations, subsequently seek to withdraw a portion of their contributed capital without dissolving the partnership or formally withdrawing from it.
The central question thus arises: does the partial return of a capital contribution constitute a taxable event under Polish personal income tax law?
The answer requires careful analysis of judicial precedent, as the Personal Income Tax Act (ustawa o PIT) does not expressly address this situation. One taxpayer’s case traversed the Polish court system for over four years before reaching final resolution in the Supreme Administrative Court (Naczelny Sąd Administracyjny, NSA).
Factual Background: Withdrawal of Real Property from a General Partnership
The taxpayer, a Polish tax resident, held a 50% participation interest in profits and losses of a general partnership (spółka jawna). The partners had contributed as capital in-kind (aport) ownership rights to land improved with a bakery building—previously held as marital co-ownership—together with additional rights including perpetual usufruct of real property and an internal roadway.
The partners contemplated a partial return of capital contribution: specifically, the return of the bakery building through reduction of their capital participation interests and transfer of this asset back to their joint marital property.
To confirm the tax treatment of this transaction, the partners submitted an application for an individual tax ruling (interpretacja indywidualna). The question presented: would the reduction of contribution and return of capital in kind trigger personal income tax liability?
In the partners’ assessment, it would not. The distribution of funds or transfer of partnership assets by reason of contribution reduction would not, they argued, generate taxable income for the recipient partner.
The Tax Authority’s Position: Return of Contribution Constitutes Taxable Income
The Director of the National Tax Information Office (Dyrektor Krajowej Informacji Skarbowej) determined the taxpayers’ position to be incorrect.
In the authority’s view, the contemplated withdrawal of a partnership asset and its return to the partners would generate taxable income subject to personal income tax. The reasoning: the taxpayer’s capital participation interest would be reduced, while the partnership’s assets—the partnership being a separate economic entity—would be diminished in favor of the taxpayer’s enrichment.
The authority classified such income under Article 10(1)(3) of the Personal Income Tax Act in conjunction with Article 5b(2), categorizing it as income from non-agricultural business activity.
The Regional Administrative Court’s Decision: Ruling Annulled
The Regional Administrative Court in Lublin (Wojewódzki Sąd Administracyjny w Lublinie), by judgment of March 8, 2019 (case no. I SA/Lu 820/18), annulled the challenged ruling, finding in favor of the taxpayer.
The court determined that the Personal Income Tax Act contains no provision expressly governing the taxation of capital contribution returns during the partnership’s existence. This situation falls outside the scope of Article 8 (governing income from partnership participation) and Article 14(2)(16) (governing tax consequences of partner withdrawal).
The Supreme Administrative Court Judgment of March 22, 2022 (II FSK 1693/19): A Consolidated Jurisprudential Line
The Supreme Administrative Court dismissed the Director’s cassation appeal, affirming the correctness of the Regional Court’s judgment.
Principal Holdings
Absence of economic enrichment. The NSA held that the partial return of a capital contribution does not generate economic enrichment within the meaning of Article 14(1) of the Personal Income Tax Act. The partner merely recovers a portion of assets previously contributed to the partnership. The amount received as return represents part of the value of previously contributed assets and simultaneously reduces the partner’s capital participation interest.
Tax neutrality of contribution and return. Given that contribution of capital to a partnership is tax-neutral, it cannot logically follow that the return of such contribution constitutes taxable income. The taxpayer receives no enrichment—merely recovering what was previously contributed.
Statutory lacuna and analogia legis. The NSA observed that the legislature failed to anticipate a situation in which partial reduction of capital participation would trigger taxation. An unintended statutory gap (luka ustawowa) thus exists, which must be filled through analogical application of Article 14(3)(11) of the Personal Income Tax Act.
Deferral of the taxable moment. Pursuant to Article 14(3)(11), upon withdrawal from a partnership, taxation applies to the excess of revenues over deductible costs, reduced by distributions made by reason of partnership participation. The NSA concluded that the taxation of distributions attributable to partnership participation is deferred until the moment of complete withdrawal from the partnership.
Cited Supreme Administrative Court Precedents
The March 22, 2022 judgment aligns with established jurisprudence. The NSA cited the following precedents:
- II FSK 1415/19 (February 15, 2022)
- II FSK 2814/18 (February 2, 2021)
- II FSK 2296/18 (December 18, 2020)
- II FSK 1790/18 (November 6, 2020)
- II FSK 3135/16 (November 13, 2018)
- II FSK 1721/16 (June 26, 2018)
- II FSK 1471/12 (May 22, 2014)
- II FSK 2046/12 (July 30, 2014)
- II FSK 1212/13 (May 27, 2015)
Practical Implications: Non-Taxable Return of Capital Contributions
The administrative courts’ position is uniform: the return of capital contribution from a transparent partnership (general partnership, professional partnership, or limited partnership prior to 2021) does not constitute a taxable event at the moment of distribution.
This means that partners contemplating partial withdrawal of contributions—whether in cash or in kind (real property, movable property, rights)—do not realize taxable income from such transaction. Taxation occurs only upon complete withdrawal from the partnership or its liquidation, pursuant to the mechanism established in Article 14(3)(11) of the Personal Income Tax Act.
Risk Considerations: The Tax Authorities’ Persistent Position
Notwithstanding the consolidated jurisprudential line, tax authorities continue to issue rulings unfavorable to taxpayers. The Director of the National Tax Information Office consistently maintains that return of capital contribution generates taxable income.
The practical implications are significant:
- Individual tax rulings will likely be negative
- Challenge before the Regional Administrative Court may be necessary
- Proceedings may extend over several years (in the analyzed case, over four years)
- Administrative courts consistently rule in taxpayers’ favor
Our Practice
We advise on partnership restructuring matters, including partial withdrawal of capital contributions. We prepare applications for individual tax rulings and represent clients in proceedings before administrative courts.
We assist in documenting transactions in a manner that minimizes the risk of disputes with tax authorities—and in preparing argumentation should dispute prove unavoidable.
The return of capital contributions and its tax treatment represents an area where statutory text diverges from administrative practice. Familiarity with NSA jurisprudence enables defense of the taxpayer-favorable position—though it requires readiness for potentially protracted proceedings.
Robert Nogacki is a Polish attorney at law (radca prawny), the founder and managing partner of Kancelaria Prawna Skarbiec (Skarbiec Law Firm), which has operated continuously since 2006.
The law is equal for everyone, but the parties rarely are: on one side stands an organization with time, money, and lawyers, on the other a person with one business, one nest egg, and one life.
Clients rarely come to him with a legal problem. They come with a problem that also has a legal side: an audit that began with a single invoice, money entrusted to someone who has disappeared, a company that has to be passed on before it is too late. Most such matters are decided long before the first letter is written, in decisions made without asking and in deadlines nobody remembered. So he begins by asking how the client got here, not what the client should have done.
He advises entrepreneurs and families from more than a dozen countries, including those whose accounts the tax office has just seized and who do not know what to do tomorrow morning. He defends them in tax audits, customs and fiscal inspections, disputes with the tax authorities, and criminal tax proceedings. He represents victims of investment fraud and Ponzi schemes. He helps families set up family foundations and plan succession, so that a life’s work outlasts a single generation.
Not every case can be won. Every case can be run so that the client knows where they stand. Since 2006 he has represented the victims in the WGI case (Warszawska Grupa Inwestycyjna, the Warsaw Investment Group), one of the longest criminal cases in the history of the Polish financial market, because some things must not be left half finished, even when they take two decades. In the case of the collapsed cryptocurrency exchange Zonda (Zondacrypto, operated by BB Trade Estonia OÜ), he represents several hundred victims in the criminal investigation conducted by Poland’s National Prosecutor’s Office and in the Estonian bankruptcy proceedings.
Kancelaria Prawna Skarbiec is listed in the rankings of Poland’s largest tax advisory firms published by Dziennik Gazeta Prawna and Rzeczpospolita, and it is a four-time recipient (2015 to 2018) of the European Medal awarded by the Business Centre Club and the European Economic and Social Committee. Robert Nogacki publishes regularly, in the press and on the firm’s website, for people who have a problem rather than a law degree, because a legal opinion the client cannot understand protects only the lawyer.
He believes that the best legal advice is the kind that means the client never has to appear in court.
