In the judgment of February 14, 2014 (case file no. II FSK 536/12) the Supreme Administrative Court confirmed that a surviving company (hereinafter the “Company”), following a merger with a target company (by takeover), if it receives income in the form of dividends or other distributions of profits from its subsidiary company, would be eligible to report the period during which the target company held a qualified shareholding in that subsidiary company so as to become eligible for the exemption set forth in Art. 22 Sec. 4a of the CIT Act.
In the case at issue, the Company applied for an individual tax ruling on CIT. In its application, it wrote that it intended to effect a cross-border merger by taking over a company seated in the Netherlands (hereinafter the ‘target company’). The legal form of the target company was a “B.V.”, the Dutch equivalent of the Polish ‘Spółka z o.o.’. The target company paid income tax on all of its income in the Netherlands, regardless of the place where its income was generated. At the merger date, the target company held 100% of shares in the Polish subsidiary company for an uninterrupted term of two years. In the future, the Company expected to receive income in the form of dividends or other profit distributions from the subsidiary company.
In this context, the Company asked the following question: “Following the merger with the target company, if the Company receives income in the form of dividends or other profit distributions from its subsidiary company, will the Company be eligible to report the period during which the target company held a qualified shareholding (of at least 10%) in the subsidiary company for the purpose of the exemption referred to in Art. 22 Sec. 4a of the CIT Act?”
According to the Company, following the merger with the target company, if the Company receives income in the form of dividends or other distributions of profits from its subsidiary company, pursuant to Art. 93 of the Tax Ordinance, it will be eligible to report the period during which the target company held 100% shares in the subsidiary company so as to qualify for the exemption under Art. 22 Sec. 4a of the CIT Act, i.e. the holding of shares in a company paying out amounts due on account of dividends or other distributions of profits for an uninterrupted period of at least two years.
The Director of the Tax Chamber in Warsaw did not agree with the Company’s submissions. In his estimation, Art. 93 of the Tax Ordinance does not explicitly stipulate the rights and obligations which are transferred to the legal successor, consequently it only concerns the public law rights and obligations existing as at the time of the merger. Conversely, the target company was not exempt from the obligation to pay tax on dividends or other profit distributions paid by the Polish subsidiary company. It did not become eligible for the exemption because no dividend was paid while it held shares in the subsidiary company. As no dividend was paid, it could not have acquired the right to tax exemption. Although the duration of the period in which the target company held shares in the subsidiary company is one of the prerequisites for the dividend becoming eligible for tax exemption, this right is not subject to tax succession. He also concluded that as the target company ceased to exist, the period of uninterrupted ownership of shares by the target company in the subsidiary company paying out the dividend had in fact been interrupted.
The case was referred to the Voivodship Administrative Court in Warsaw, which agreed with the Company’s argumentation and repealed the tax ruling on appeal. As a result of the last resort appeal (cassation) filed by the tax authority, the Supreme Administrative Court issued a judgment whereby it dismissed the last resort appeal.
According to the Supreme Administrative Court, the Company was right in arguing that Art. 93 Tax Ordinance provided for the principle of the general succession of a taxpayer’s rights and obligations in mergers, including takeovers. The fact that this provision was included in the Tax Ordinance, not the CIT Act, is without prejudice to its usefulness in the present matter. After all, this provision is universal in nature in terms of substantive law. Consequently, it is irrelevant that in the CIT Act the legislator failed to include any regulations regarding the fulfillment of the condition referred to in Art. 22 Sec. 4a in conjunction with Sec. 4 of the CIT Act, in the context of legal succession, as in Art. 93 Tax Ordinance the legislator regulated the succession by the surviving company of the rights and obligations of the target company. This principle also applies to cross-border mergers between companies limited by shares. The fact that the acquired Dutch company did not receive any dividend from the Polish subsidiary company is of no relevance to the present matter. The succession under Art. 93 § 2 Tax Ordinance applies to all rights and obligations provided by tax law, rather than only those rights which have been actually exercised. Consequently, if the Dutch company did not receive any dividend from the Polish subsidiary company, this does not mean that the Company will be deprived of this right if it receives dividend from the subsidiary company following the merger. The existence of the right to benefit from a tax exemption and the performance of these rights are two separate things.
This is yet another judgment in a series of advantageous judgments which stipulate that the principle of legal succession under Art. 93 Tax Ordinance applies not only to the rights and obligations existing as at the transformation date. This enables us to take into account a broader spectrum of a transformed company’s business activities, including all the consequences of the legal events which had arisen in the target company. By the same token, the succession also applies to the rights materializing as a result of the lapse of time. Although the judgment referred to above seems to have contributed to establishing a consistent line of jurisdiction, it is evident that the tax authorities are inclined to favor the disadvantageous approach.