Ruling description

The Supreme Administrative Court (NSA) ruled on February 13, 2015 (case file no. II FSK 3280/12) that an in-kind distribution of 100% of shares of a limited liability company made by a limited partnership does not satisfy the premises of the so-called exchange of shares, hence a partner of the limited partnership, i.e. a limited liability company, should recognize the income already at the time when the said distribution in kind was effected.

According to the facts of the discussed case the partners of a limited partnership planned to contribute 100% of the shares of a limited liability company (a subsidiary) held by the said limited partnership to another limited liability company (a holding company). The limited partnership was the sole shareholder of a holding company. The NSA ruled that the limited partnership does not satisfy one of the criteria for recognizing the transaction as an exchange of shares, namely the criterion of being subject to taxation on the whole of its income in the EU/EEA member states, irrespective of the place in which the income was generated. Taking into account the above, the court explained that the said condition is related to the tax capacity of the entity participating in the transaction (i.e. a limited partnership) and not by the object criterion (i.e. taxation of income generated by the undertaking operating in the form of a partnership). 

Comment

The option of a tax neutral exchange of shares in the situation in which one of the companies participating in the said exchange is a transparent partnership seems controversial. Please note that the same court in the rulings of January 30, 2015 (case file number II FSK 3244/12 and II FSK 3245/12) given on the basis of identical facts involving, however, natural persons being shareholders of a limited partnership, ruled that the aforementioned operation will, on their part, satisfy the conditions of a tax neutral exchange of shares. The above clearly indicates significant discrepancies in the rulings handed down by the NSA. There are arguments which prove that the interpretation of law presented in the discussed ruling is over restrictive and does not take into account the systemic context.

Bearing in mind the above, in order to avoid a dispute with tax authorities, the undertakings which plan to exchange shares and conduct their business activities in the form of a tax transparent partnership should consider the transformation of a limited partnership into a company limited by shares or take advantage of alternative methods of obtaining planned capital structure