New mode of connection raises tax controversy
The aim of introducing the new merger mode was to simplify merger processes within the same capital group. However, its introduction has not been properly correlated with changes in tax law, write Marek Kończak, senior manager and Patrycja Krzymińska, senior consultant at Thedy & Partners, in Rzeczpospolita.
On 15 September 2023, an amendment to the Code of Commercial Partnerships and Companies came into force, introducing a new simplified merger procedure for capital companies, consisting in the possibility of carrying out a merger without granting shares of the acquiring company to the shareholders of the acquired company.
The provision of the Commercial Companies Code added under the amendment regulates the new simplified merger procedure. It may be applied when one shareholder holds directly or indirectly 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. A characteristic feature of this type of merger is that no new shares are issued by the acquiring company.
In principle, company mergers are tax-neutral once certain conditions are met. One of the conditions for a merger to be tax-neutral for the acquiring company is that the issue value of the shares (stocks) allotted to the shareholders (stockholders) of the acquired company be not lower than the market value of the assets of the acquired entity received by the acquiring company (Article 12, section 1, item 8d of the CIT Act). This provision has not changed due to the entry into force of the new regulations.
Position of the director of the KIS
The acquiring company applied for an individual interpretation (dated 21 December 2023, ref. 0111-KDIB1-1.4010.680.2023.1.AW) regarding the determination of whether taxable income will arise as a result of the non-emission merger. The applicant indicated that it is part of an international group of companies and that its sole shareholder is a German company, which is also a shareholder in other group entities.
The applicant indicated that, as a result of business decisions, a merger of the group entities was planned in a newly regulated manner.
The acquiring company wanted to confirm that the planned merger would be tax-neutral for it, in particular that no CIT taxable income would arise on its side under Article 12(1)(8d) of the CIT Act.
The applicant took the view that this provision would not apply because the merger would not result in the issuance of any shares and, therefore, in the allocation of shares in the acquiring company. In the applicant’s opinion, in the absence of an issue of shares (stocks) of the acquiring company to a shareholder (shareholder) of the acquired company, no CIT taxable revenue will arise on the part of the acquiring company.
However, the director of the KIS did not agree with this position, indicating that revenue would arise precisely under Article 12(1)(8d) of the CIT Act. The authority pointed out that this provision is used to determine income from the acquired assets in the part corresponding to the share of other shareholders in the share capital of the acquired company. In order to determine the value of the assets constituting revenue, the market value of the assets of the acquired entity should be compared in this case with the issue value of the shares allotted to the shareholders of the acquired company. On the other hand, according to the authority, if there is no issue of shares, it means that the entire value of the acquired assets constitutes tax revenue.
Consequently, the authority assumed that in the described situation, the entire market value of the assets of the acquired company should be taxed.
The entire analysis was published in Rzeczpospolita of 25 March 2024, pp.: D6-D7