Consolidation of capital groups is an activity that, in principle, should lead to an improvement in the position of companies in the market. Through reorganization resulting in the merger of companies into a single entity, the resulting legal entity, thanks to the accumulation of capital, will be able to successfully challenge larger competitors in the market. Gathering in one place the assets held, among others, in the form of real estate and cash, allows for larger investments and economic expansion. The aforementioned consolidation can take place in a couple of variants, including through mergers of companies. The process of merging companies can take up to several months and may involve certain tax consequences, so it is important to carefully analyze the available options and choose the most suitable one in a given situation before starting such plans.
Merger of limited liability companies
First of all, it should be noted that a merger transaction is, in principle, a tax-neutral activity. However, the legislator has decided to include in the Polish tax regulations conditions that must be met in order for such a transaction not to result in a tax obligation. One of the most important conditions is that the transaction must be carried out for legitimate economic reasons (i.e. providing business substance of the transation), not forgetting the obligation to continue the tax valuation of the assets acquired through the merger for business operations and the condition of first reorganization. In practice, the first reorganization condition means that in the case of a merger or division of companies, the income of a shareholder of the acquired company equal to the issue value of the shares (stock) allocated by the acquiring company is not recognized as income if the shares (stock) of the acquired company were not purchased or acquired as a result of an exchange of shares or allocated as a result of another merger or division of companies. Additional neutrality conditions, such as the aforementioned first reorganization requirement, have been introduced into the Polish legal system under the so-called “Polish Deal” as of January 1, 2022. As a result of the amended regulations, tax neutrality of mergers has become more difficult to achieve, although it is still possible.
Restructuring can bring many economic benefits resulting from, among other things, simplification of the group’s structure, while it should be borne in mind that if carried out improperly it can bring more damage than benefits. Before analyzing tax issues, it is worth considering the provisions of the Code of Commercial Companies, according to which a merger of capital companies can be carried out in two ways:
- by transferring the assets of the target company to the acquiring company, in exchange for shares that the acquiring company grants to the shareholders of the acquired company, or
- by forming, for example, a new capital company, to which the assets of all the merging companies are transferred for shares in the new company.
In addition, it is worth mentioning that it is also important to know according to which accounting method the merger will be settled. The provisions of the Accounting Act allow two forms of mergers, i.e. by means of the share purchase method or the share pooling method. The main differences between these methods (in the case of the acquisition of one company by another) include:
- the method of valuation of assets:
- purchase method – the assets of the acquired company are recorded on the balance sheet of the acquiring company at their fair value as of the date of acquisition,
- pooling method – the assets of the two companies are aggregated without changing their valuation as of the merger date. Asset values remain the same as before the merger,
- closing of the accounting books:
- purchase method – obligation to close the books on the day before the merger date,
- pooling method – no obligation to close the books,
- preparation of CIT-8 return:
- purchase method – declaration to be filed after closing of books (acquired entity) and after the end of the acquiring entity’s tax year,
- pooling method – one declaration after the end of the year (in the absence of closing the books of the acquired entity at the time of the merger).
Merger without issuing shares – practice of tax authorities.
According to the provisions of the Corporate Income Tax Act (hereinafter: the CIT Act), for the acquiring company income in a merger is, among other things, equal to the market value of the assets of the acquired company in excess of the issue value of the shares allocated to the shareholders of the merged companies. On the other hand, as of September 15, 2023, Article 5151 was added to the Code of Commercial Companies, according to which merger without issuing shares may occur if one shareholder directly or indirectly holds all the shares in the merging companies, or the shareholders of the merging companies hold shares in the same proportion in all the merging companies.
Example
On the other hand, in the case of a merger without issuing shares, the matter is not as clear-cut as in the case of a merger in which new shares are issued. The aforementioned regulation indicates that the taxable income equals to the amount exceeding the issue value of the shares allocated to the shareholders of the merged companies over the market value of assets. That raises the question – how to apply this regulation if there are no shares issued in the merger? In that case, should the entire market value of the assets be the tax base? Or, on the other hand, because there is no issuance of shares, will the provision not apply because the premise of issuance of shares will not be met?
A literal interpretation of the provision may suggest that if no shares in the acquiring company are issued to the shareholders of the acquired company, the condition of share issuance will not be met. Consequently, this should not result in taxable income, and the provision should not apply. However, the section of the regulation stating that the income is determined by the market value of the acquired entity’s assets exceeding the issue value of the shares may also imply that the absence of share issuance results in the obligation to tax the entire market value of the acquired assets.
Accordingly, this issue has become the subject of numerous requests for tax rulings. The director of the National Tax Information issued a couple of rulings in which he stated that in the case of a merger of companies, where there is no issuance of shares, no tax obligation arises under Article 12(1)(8d) of the CIT Act (among others, sign: 0111-KDIB1-1.4010.157.2023.4.RH, sign: 0111-KDIB1-1.4010.109.2023.2.AW). However, it is worth noting that these rulings were issued before the amendment to the Code of Commercial Companies, introducing the possibility of an merger without share issuance.
Accordingly, this issue has been the subject of numerous requests for tax rulings. The Director of the National Tax Information Service issued two rulings in which he stated that in the case of a merger of companies without an issue of shares, no tax liability arises in accordance with Article 12(1)(8d) of the CIT Act (reference: 0111-KDIB1-1.4010.157.2023.4.RH, reference: 0111-KDIB1-1.4010.109.2023.2.AW). However, it should be noted that these interpretations were issued prior to the amendment to the Commercial Companies Code, which introduced the possibility of a merger without an emission of shares.
In one of the aforementioned tax rulings, the applicant stated that there would be no issuance of shares on the basis of Article 514 of the Code of Commercial Companies, according to which “the acquiring company may not acquire shares or treasury shares for the shares it holds in the acquired company and for its own shares or treasury shares in the acquired company”. Consequently, the assessment of the position of the Director of the National Tax Information Authority does not apply to the application of Article 5151 of the Code of Commercial Companies in a merger.
The position of the tax authority in rulings concerning mergers using Article 5151 of the Code of Commercial Companies and the interpretation of Article 12(1)(8d) of the CIT Act is no longer so favorable to taxpayers. For example, in an tax ruling dated April 3, 2024 (reference: 0111-KDIB2-1.4010.60.2024.1.KK), the authority stated the following:
“Thus, since the Merging Company will not assign (…) S.A. (i.e. 100% shareholder of the merged companies) of shares in connection with the planned Merger, the income for the Acquiring Company will be the market value of the Acquired Company’s assets, determined as of the day preceding the date of the Merger, which in the described situation in its entirety constitutes the surplus referred to in Article 12(8d) of the CIT Act.
At the same time, it should be noted that it is difficult to accept such an understanding of the aforementioned provision, which would lead to the conclusion that income would arise in the event of the distribution of shares (stocks), rather than of the situation when they are not distributed at all (due to the receipt of assets, the acquiring company would not bear any burden).”
Similarly, in 0114-KDIP2-1.4010.6.2024.3.AZ, 0111-KDIB1-1.4010.680.2023.1.AW, 0111-KDIB1-1.4010.701.2023.2.AW.
In addition, it is worth mentioning that the Provincial Administrative Court also ruled on this issue in its judgment of June 25, 2024 (ref. I SA/Wr 104/24). In the text of the judgment’s grounds, the court confirmed the correctness of the ruling’s understanding applied by the Director of the National Tax Information, indicating as follows:
“In the court’s opinion, if there is no distribution of shares (stocks), it means that the entire value of the acquired assets constitutes income. It is clear from the wording of the application that 100% of the shareholder of the Acquiring Company and the Target Company is M. (2). No shares of the Acquiring Company will be emitted and issued in connection with the Merger. Therefore, since the Acquiring Company will not allocate any shares to M. (2) (i.e. 100% shareholder of the merged companies) in connection with the planned Merger, the income for the Applicant (the Acquiring Company) will be the market value of the assets of the Acquired Company determined as of the day preceding the date of the Merger, which in the described situation in its entirety constitutes the surplus referred to in Art. 12(1)(8d) of the A.P.C. Thus, the Director of the National Tax Information rightly concluded that on the part of the Applicant (the Acquiring Company), as a result of the planned Merger, income will arise, pursuant to Article 12(1)(8d) of the A.P.C., at the market value of the assets of the Target Company determined as of the day preceding the date of the Merger.”
Summary
Polish tax regulations allow group reorganization to be carried out in a number of ways. Its proper execution is crucial for the future economic, business and tax consequences of the resulting entity. During the consolidation process, it is important to keep in mind the numerous conditions that must be met for the process to be tax-neutral. Advicero experts will be happy to help you plan the restructuring of your group in the most optimal way that will fully meet the requirements. If you have any questions in this regard, we invite you to contact us.
