The Administrative Court (WSA) in Poznań ruled on May 28, 2014 in combined cases nos. I SA/Po 1214/13 and I SA/Po 1215/13 that the tax exemption in connection with “exchanges of shares” referred to in Art. 24 Sec. 8a of the PIT Act is not available when a new company is established in which shares are taken in exchange for an in-kind contribution of shares in another company. The taxpayer taking up the shares in the newly-established company is deemed to have earned income/revenue from monetary capital referred to in Art. 17 Sec. 1(9) of the PIT Act.
The ruling was handed down in a case brought in connection with a tax ruling issued by the Minister of Finance at the request of an individual contemplating the establishment, together with other individuals, of a limited liability company (Company A) the shares in which would be acquired by its shareholders in exchange for in-kind contributions in the form of shares in another limited liability company (Company B). The applicant requesting the tax ruling held 51% of shares in Company B, translating into 51% of the votes at the meeting of shareholders and planned to contribute these shares to the new Company A ahead of all the other prospective shareholders. In exchange, he was to receive shares in Company A while Company A was to acquire shares in Company B giving it a majority of the votes at the latter’s meeting of shareholders.
The applicant proposed that as a result of the in-kind contribution giving him shares in Company A, he would not earn any income/revenue since the transaction in- volved would be an “exchange of shares” which ought to be seen as tax-neutral to the applicant pursuant to Art. 24a Sec. 8 of the PIT Act.
In its tax ruling the tax authority disagreed with this interpretation, arguing that pursuant to Art. 24 Sec. 8a of the PIT Act, an “exchange of shares” is tax-neutral when at least two companies already exist, one of which performs an act in law consisting in an exchange of shares with at least one shareholder of the other company. Tax exemption does not apply, however, if the company receiving the in-kind contribution (shares in another company) is still in its organization stage since, according to the tax authority, the Commercial Company Code provides that companies in organization may not acquire their own shares for subsequent transfer to their founders joining them.
The WSA in Poznań agreed with the tax authority and dismissed the complaint filed in both the reviewed cases. The Court pointed out that the tax authority made no mention in its ruling to Council Directive 2009/133/EC of 19 October 2009 on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States and to the transfer of the registered office of an SE or SCE between Member States. The Court saw no reason why the provisions of this Directive should not apply to exchanges of shares among domestic companies, because this makes for equal treatment of companies operating within the EU. Given that Directive 2009/133/EC expressly enumerates the entities to which the regulations governing exchange of shares apply (viz. joint stock companies and limited liability companies), these regulations cannot be seen as applicable to entities not so enumerated (viz. companies “in organization”) since the regulations are not subject to extensive interpretations. Accordingly, the conclusion to be drawn, in light of Art. 24 Sec. 8a of the PIT Act, is that no “exchange of shares” in the meaning of the said Directive would be taking place in the considered case and that the applicant will be earning income/revenue in the meaning of Art. 17 Sec. 1(9) of the PIT Act.
The first thing to point out is that both the tax ruling and the Court judgment were issued on the grounds of regulations in force prior to January 1, 2014. As of that date, Art. 24 Sec. 8b of the PIT Act became applicable, providing that Art. 24 Sec. 8a of the PIT Act concerning the tax neutrality of the “exchange of shares” applies if both the acquiring company and the company whose shares are being acquired are of the types listed in Schedule 3 to the PIT Act which does not in fact list companies that are at the “in organization” stage. The PIT Act, as currently worded, therefore explicitly rules out tax exemptions for “exchanges of shares” involving transfers in the form of in-kind contributions to newly-established companies (in organization).
Taxpayers contemplating tax optimization solutions involving “exchanges of shares” should bear in mind that transactions of this kind will not be considered tax- neutral if newly-established companies are involved.