New Deal - restructuring

On July 26, 2021, the Ministry of Finance published the Draft Amendments to the Personal Income Tax Act, the Corporate Income Tax Act and some other acts, which raises many interpretation doubts.

The proposed amendment concerns, among others: mergers and divisions of companies, exchange of shares and contributions in kind, which should be tax neutral under Council Directive 2009/133/EC. Tax neutrality consists in shifting the moment of taxation of the income of the entity that was a participant in the transaction until the sale of shares or stocks.

Exchange of shares

The exchange of shares consists in the acquisition by a company from a shareholder of another company of shares in that other company in exchange for transferring its own shares to the shareholder. The current regulations make the tax neutrality of this transaction conditional on the fulfilment of the conditions resulting from the aforementioned EU directive. The planned changes provide for the fulfilment of two additional conditions in this regard (Article 12(11) points 2, 3 and 4 of the CIT Act):

• the shares contributed by the shareholder were not acquired or acquired as a result of a share exchange transaction or were not allocated as a result of a merger or division of entities; and
• the value of shares purchased by a shareholder, adopted for tax purposes, may not exceed the value of shares contributed by this shareholder, which would be assumed by this shareholder for tax purposes, if the shares had not been exchanged.

The need to meet these conditions will mean that a shareholder who acquired shares in the past as a result of a share exchange, division or merger of companies will be deprived of the right to benefit from tax neutrality in the subsequent exchange of shares. The existence of an economic justification for concluding such a transaction will not be of any importance in this case.

The draft amendment does not contain transitional provisions in this regard, and as a result, the presented changes will apply to restructuring transactions made from January 1, 2022, but the tax obligation will also apply to exchange transactions of those shares that were acquired by the taxpayer by exchange shares, division or merger made before January 1, 2022.

Merger or division of companies

According to the new wording of Art. 12 sec. 4 point 12 of the CIT Act, a merger or division of a company will not be tax neutral if:

• the shareholder's shares in the company being acquired or divided were acquired or acquired as a result of an exchange of shares or allocated as a result of a merger or division of entities;
• the value of shares/shares allocated by the acquiring or newly established company, adopted by the shareholder for tax purposes, is higher than the value of shares/stocks in the acquired or divided company, which would be assumed by this shareholder for tax purposes, if the merger or division had not taken place.

Failure to meet the above conditions will result in the creation of taxable income (revenue) of the shareholder of the company being acquired or divided at the time of the merger or division of the companies. The income will be the surplus of the nominal value of the shares/shares allocated by the acquiring or newly established company over the expenses for the purchase or subscription of shares/stocks respectively.

The draft also provides for shifting the burden of proof in terms of meeting the conditions ensuring tax neutrality of the exchange of shares, division and merger of companies onto the taxpayer.

Contribution-in-kind

The draft amendment also provides for limiting the tax exemption for income from taking up shares in exchange for a contribution in kind, if the subject of the contribution is an enterprise or an organized part of an enterprise (amendment to Article 12(4)(25)(b) of the CIT Act).

Currently, the in-kind contribution of an enterprise or an organized part of an enterprise to a company is not taxed. However, the draft assumes an additional condition - the in-kind contribution will not be taxed if the company receiving it accepts for tax purposes the components of this enterprise or its organized part in the value resulting from the tax books of the contributing entity.

Taxation of the transaction will depend on the actual recognition of the transaction in the tax books of the other party to the transaction. In practice, the planned provisions may result in sanctions for both the contributor and the recipient. Even if the difference between the value resulting from the tax books of the contributor and the value at which the recipient of the contribution accepted the value of the assets in its books is insignificant or results from a simple mistake on the part of the contributor, the full value of the subject of the contribution will be taxed.

According to the draft amendment, if the assets that were the subject of the contribution were assigned to activities conducted outside Poland, the burden of proof that these assets were correctly recognized in the tax books of the recipient of the contribution will rest with the contributor.

To sum up, it should be stated that the proposed amendments to the CIT Act, to the extent that they provide for the taxation of the second and subsequent transactions of exchange of shares, mergers or divisions of companies and contributions in kind, not only increase the risk of the transaction, for example by making its tax neutrality dependent on the conduct of the other party, but also impose additional obligations on taxpayers. The tax neutrality of the transaction after January 1, 2022, assuming the entry into force of the planned regulations, will depend on the method of acquiring the shares being the subject of the transaction.

As a result, it is recommended to take appropriate restructuring measures this year.