Ruling Description

The Provincial Administrative Court in Wrocław found in a judgment of July 15, 2014 (case file no. I SA/Wr 1493/14) that a company does not lose the right to benefit from the CIT exemption of a dividend when shares in the dividend-paying company are transferred to its successor before the end of the qualified shareholding period.

The case concerns establishment of a joint stock company to which a majority stake in another Poland- based company was allotted and which received income (dividend) from the shares allotted to it. This income was deemed CIT-exempt under the dividend tax exemption mechanism which may apply if a company holds shares in another company for an uninterrupted period of two years (although this condition don’t need to be fulfilled on the date of dividend payment). In a later development, the company concerned effected a demerger by spin- off, resulting in a portion of its assets becoming the establishment mentioned above, with this and the assets which remained with the company forming two distinct organized parts of an enterprise. The Court asserted that although the plant spin-off took place before the end of the period of qualified shareholding, which is required  for the company to become eligible to tax exemption of the dividend it received, this period continues to run and, accordingly, the dividend tax exemption continues to apply to dividends from shares in the company collected by its successor.

Comment

The position taken by the Court merits approval. The scope of tax succession in the event of a merger or demerger of companies is regulated in Article 93c of the Tax Ordinance, which provides that the acquiring legal entities or legal entities established as a result of a demerger assume, as of the date of the demerger or spin-off, all the rights and obligations of the legal person undergoing demerger set out in legal regulations and relating to the assets allocated to them in the distribution plan, provided that the assets being taken over and, in the case of demerger by spin-off, also the assets of the legal entity undergoing demerger constitute an organized part of an enterprise.

The Court found that that in the context of the dividend tax exemption mechanism, the requirement for the two- year uninterrupted shareholding in the company paying the dividend or transferring some other income from participation in the profits of legal persons constitutes a right subject to tax succession. Importantly, this requirement does not have to be fulfilled by the legal predecessor in order for the successor to avail itself of the tax exemption. Analogous views prevail in judgments handed down by administrative courts in similar cases ​(cf. e.g. the judgments of the Supreme Administrative Court of February 14, 2014 in case no. II FSK 536/12, of September 10, 2013 in case no. II FSK 2503/11 and of March 26, 2013 in case no. II FSK 1675/11). 

What must be borne in mind, however, is that the tax authorities insist on a different view and refuse to allow the discussed exemption in cases when the qualified shareholding requirement was not fulfilled by the legal predecessor before the event triggering the tax succession took place. Hopefully, faced with this consistent trend in court rulings, the tax authorities will eventually come around to the same position.