The Provincial Administrative Court in Gdańsk, ruled on March 16, 2015 (I SA/Po 1630/15) that the revenue generated by the merger of companies when the merger lacks economic justification as referred to in Article 10 Section 4 of the CIT Act, is subject to taxation, on the level of the surviving company, pursuant to general tax principles.
A limited liability company (“Company”) applied for an individual tax ruling concerning its corporate income tax (CIT) liabilities. The Company stated that it would become a partner in a joint-stock limited partnership that will be merged into the Company. Before the merger the joint-stock limited partnership would be transformed into a limited liability company. In view of the fact that on the date of the merger the Company would hold 100% of shares in a share capital of the limited liability company, the merger would be conducted without increasing the share capital of the Company. Further to the planned restructuring, the Company inquired whether, in a situation in which the said restructuring is not conducted for economic reasons, the Company would generate income from participation in the profits of legal persons. The Company expected confirmation that if it was found that the merger was not conducted for justified economic reasons, the Company would generate income from participation in the profits of legal persons as referred to in Article 10 Section 1 of the CIT Act and, in consequence, the said income could be subject to the income tax exemption based on the principles as provided for Article 22 Sections 4-4b of the CIT Act.
Both the Head of the Tax Chamber and the Provincial Administrative Court ruled that the generated income upon merger should not be deemed to be income under Article 10 Section 1 of the CIT Act, but the income should be subject to taxation pursuant to general tax principles. Due to the fact that the income would be related to the acquisition of a company, it cannot be treated as payment referred under Article 22 Section 1 of the CIT Act. By the same token, the exemption under Article 22 Section 4 of the CIT Act would not apply. Consequently, the income of a parent company in relation to the takeover of the assets of a limited liability company would not be subject to a CIT exemption on the principles specified in Article 22 Sections 4-4b of the CIT Act.
Thus far, the problem of economic justifiability of a merger has not been the object of too many court rulings. In practice, the stance favoured to date in respect of upstream mergers was that, if a surviving company being a shareholder in a target company for a minimum period of 2 years, the possible income which could be generated in connection with the merger should be subject to tax exemption as provided for in Article 22 Sections 4-4b of the CIT Act. The stance confirmed by the commented court ruling indicates that there is a risk that the tax authorities may in future question the above approach. If a merger is considered, it is highly advisable to carry out a detailed analysis, including its evidenced economic justification, in order to eliminate this negative interpretation.