WSA: Rules limiting tax neutrality of restructuring should not be applied

The provisions limiting the tax neutrality of restructuring have been controversial from the outset. Tax advisers since their introduction as part of the so-called Polish Deal have pointed to their incompatibility with EU law, as well as controversies related to the constitutional principle of non-retroactivity.

As Marta Paduszyńska of Thedy & Partners explains, the provisions introducing restrictions on the tax neutrality of restructuring did not contain transitional provisions, which in practice means that any restructuring carried out in the past, as a result of which shareholders acquired shares, constitutes the ‘first restructuring’ within the meaning of the CIT Act. On the practical side, this has affected the need to verify the entire history of the entity involved in the restructuring and has further increased the tax risks associated with such transactions.

Taking into account the wording of the so-called Merger Directive (2009/133/EC), all reorganisations that do not have the character of tax avoidance or evasion should be tax-neutral for all parties to such an operation. The Merger Directive does not provide for an exemption simply because of the completion of a second or subsequent reorganisation involving the same taxpayers.

These doubts were shared by the administrative courts, including the WSA in Olsztyn in its judgment of 28 June 2023 (I SA/Ol 118/23).

– According to the verdict of the WSA in Olsztyn (non-final ruling), the restriction of the tax neutrality of mergers and demergers to the first reorganisation activity is contrary to EU law and should not be applied to transactions that took place before its entry into force. Due to the contradiction of Polish regulations with overriding EU law, the provisions limiting the tax neutrality of restructuring should not be applied to Polish taxpayers, explains Marta Paduszyńska.

Moreover, the WSA in Olsztyn confirmed that these regulations violate the constitutional principle of non-retroactivity of the law. Due to the lack of relevant transitional provisions, the new regulations do not have retroactive effect, and therefore the provisions limiting the neutrality of the reorganisation should only be applied to factual states that occurred entirely after the date of their entry into force.

– This judgment, although not final, gives taxpayers hope for the emergence of a new line of jurisprudence with regard to the tax neutrality of subsequent restructuring transactions, adds Marta Paduszyńska.