Significant changes in the settlement of losses in the restructuring of the enterprise from 01/01/2021

From January 1, 2021, the amendment to the CIT Act introduced new restrictions on the settlement of tax losses in the restructuring of business entities and M&A. As a result, in order to properly plan activities, it is advisable to analyze the economic premises and their fiscal consequences in detail.

Limiting the possibility of loss settlement after the takeover or acquisition of another enterprise

From January 1, 2021, Art. 7 sec. 3 point 7 was added to the CIT Act, according to which, when determining the tax base, the taxpayer will not be able to take into account his losses if the taxpayer took over another entity or acquired an enterprise or an organized part of an enterprise, including in kind, or received by a cash contribution for which the taxpayer acquired an enterprise or an organized part of an enterprise, as a result of which:

• the subject of the actually conducted basic business activity by the taxpayer after such takeover or acquisition, in whole or in part, is different from the subject of the actually conducted basic business activity by the taxpayer prior to such takeover or acquisition, or
• at least 25% of the taxpayer's shares (stocks) are owned by an entity or entities that did not have such rights at the end of the tax year in which the taxpayer suffered such a loss.

As a result, the right to deduct the loss will be deprived of the acquiring companies, in which, as a result of restructuring, the subject of activity has changed or a new significant partner has appeared.

The limitation in loss settlement introduced from January the 1^st ,2021 will apply regardless of the application of the circumvention clause, i.e. whether the restructuring was carried out for justified economic reasons.

It should be borne in mind that it is also necessary to calculate losses from business activity and capital income separately, while income from a given source can only be reduced by tax losses from the same source.

Reverse connections also with limitations

When referring to restructuring activities, it is also worth paying attention to a quite specific way of merging companies, which is the so-called a reverse merger, which involves the daughter company taking over its direct partner (shareholder), the so-called parent company.

As a result of this type of merger, even if the subject of activity does not change, there will be a significant change in the ownership structure, which will result in the application of a new regulation limiting the possibility of accounting for a tax loss by the acquiring company.

Also in the case of a reverse merger, the fact that it was made for justified economic reasons will not be relevant when applying the limitation in loss settlement.

Restructuring activities and tax strategy

Moreover, from January 1, 2021, some taxpayers will be obliged to prepare and publish information on the implemented tax strategy for 2020.

The tax strategy should contain, inter alia, information on restructuring activities planned or undertaken by the taxpayer, which may affect the amount of tax liabilities of a given entity, as well as related entities.

Downloads

• PKF Alert - Significant changes in the settlement of losses in the restructuring of the enterprise from 01.01.2021.pdf [PDF]