Debt-to-equity conversion not always tax neutral
In a recent ruling (II FSK 1226/22), the Polish Supreme Administrative Court (NSA) addressed the issue of tax implications of converting debt into equity. The judgment confirms that such a transaction is not always tax neutral.
Court’s position
The Court held that if the nominal value of the contributed receivable exceeds the value of the shares issued in exchange, the debtor company (issuing the shares) gains an economic benefit.
According to the NSA, such a conversion produces an effect equivalent to partial debt forgiveness, i.e. a gratuitous release from part of the obligation.
Tax consequences
The difference between:
-
the nominal value of the debt (including principal and interest), and
-
the value of the shares issued in exchange
should be treated as taxable income arising from a gratuitous benefit.
This position is consistent with previous rulings — a similar conclusion was presented in the judgment of 21 October 2022 (II FSK 537/20).
Why it matters
As noted by Agata Faliszewska, Senior Consultant at the CIT team of Thedy & Partners:
“The NSA’s position is particularly relevant in situations where the market value of the converted receivable is lower than its nominal value, which may lead to taxation of the conversion.”
Implications for taxpayers
The ruling confirms that debt-to-equity conversions require careful tax assessment, especially where there is a discrepancy between the nominal and market values of the debt.
In practice, this may result in the need to recognize taxable income on the part of the debtor company.
If you have questions about the tax implications of reorganizations or debt conversions, contact Thedy & Partners — our experts will be happy to discuss the practical aspects of this issue.