Ruling description

The Supreme Administrative Court (the NSA) ruled in a judgment handed down on November 28, 2013 (case no. II FSK 2595/12) that a transfer in-kind of the assets of a liquidated limited liability company to its sole shareholder should not be treated as a sale of assets against payment. Although the transfer of assets in the case at hand ext- inguishes the company’s debt toward its shareholder, the latter provides no equivalent consideration to the company. Such an asset transfer is therefore not liable  to CIT.

Comment

Recently, the issue of whether or not a transfer in-kind of liquidation assets by a capital company is liable to income tax aroused controversy. The tax authorities were initially of the view that the liquidated company was not liable to income tax as a result of such a transfer. However, even though nothing in the relevant regulations has changed, they have consistently held since 2012 that the liquidated company is liable to income tax due to such transfers. According to the tax authorities, any transfer of assets by the company to its shareholder in the course of liquidation should be treated, in com- pliance with the CIT Act, as a sale of those assets against payment.

Nevertheless, the NSA generally leans toward the view that a transfer of assets in kind to a shareholder due  to the liquidation of a company should not be liable to tax the way a sale of assets would be. This is due to the fact that the considerations of the company and of its shareholder are not equivalent. As a result of the liquidation, the shareholder receives the company’s assets, while the liquidated company receives no payment in return from the shareholder.

The ruling under consideration should be applauded. In fact, the NSA has upheld the ruling practice so favorable to taxpayers and reversed one of the WSA’s few adverse rulings on the matter.

Notwithstanding the above, business entities should bear in mind that the CIT Act will fundamentally change as of January 1, 2015 on this point and that under the new Article 14a of the Act, transfers in- kind, in principle, will be liable to CIT.