Table of Contents:
- What is a simplified merger?
- What are the tax implications of a simplified merger?
- What is the stance of the courts?
On September 15, 2023, amendments to the Polish Commercial Companies Code (k.s.h.) came into effect, introducing changes to reorganization processes—particularly enabling simplified mergers of sister companies, i.e., companies where one shareholder directly or indirectly holds all shares or stocks. Under the new provisions, such mergers can now be carried out without increasing the share capital of the acquiring company, i.e., without issuing new shares or stocks. Unfortunately, the regulations remain practically dormant due to the troubling position of the National Tax Information (KIS).
What is a simplified merger?
The newly added Article 515¹ §1 of the k.s.h. states that a merger can be carried out without granting shares or stocks of the acquiring company if one shareholder directly or indirectly holds all shares or stocks in the merging companies, or the shareholders of the merging companies hold shares or stocks in the same proportion in all merging companies. This option is particularly useful for entrepreneurs operating within corporate groups aiming to streamline their structure. For multiple sister companies, a merger can reduce costs related to management, administration, staff, and equipment while maintaining the business profile and essential assets for operations. Simplified mergers accelerate restructuring processes while offering tangible savings on merger-related expenses.
What are the tax implications of a simplified merger?
In principle, mergers are tax-neutral, and tax liability arises only if the market value of the assets of the acquired company exceeds the nominal value of shares (stocks) issued to the shareholders of the acquired company. It would seem that the legislator did not intend to introduce a new merger mode that would result in different tax consequences. However, tax regulations have not been appropriately adjusted to the new k.s.h. provisions, raising numerous doubts.
In its 2024 tax interpretations (e.g., issued on February 13, 2024, ref. 0111-KDIB1-1.4010.712.2023.2SG, and February 14, 2024, ref. 0111-KDIB1-1.4010.701.2023.2.AW), the Director of the National Tax Information referred to Article 12(1)(8d) of the CIT Act. This provision suggests that the acquiring company may generate taxable income equal to the surplus of the market value of the acquired company’s assets over the nominal value of shares or stocks issued to the shareholders of the acquired company. Since no new shares or stocks are issued in a simplified merger of sister companies, the authority concluded that the acquiring company always generates taxable income equal to the total market value of the acquired company’s assets. If no shares or stocks are issued (nominal value = 0), the acquiring company’s taxable income equals the entire value of the acquired assets.
This interpretation contradicts the legal framework. Article 12(1)(8d) of the CIT Act should not apply to simplified mergers. As such mergers inherently do not involve granting shares or stocks to the shareholder of the acquired company, it is impossible to apply provisions that calculate taxable income based on these actions. A proper legal interpretation reveals that the conditions required to trigger taxable income do not materialize in simplified mergers.
Furthermore, the CIT Act should be interpreted with reference to the purposive interpretation of the EU Council Directive 2009/133/EC of October 19, 2009, which mandates tax neutrality for restructurings like mergers. Applying the Directive, taxable income under Article 12(1)(8d) of the CIT Act should not arise.
Regrettably, the KSH amendments simplifying merger procedures did not prompt corresponding changes to the CIT Act to regulate the tax consequences of such transactions.
What is the stance of the courts?
In a recent ruling, the Provincial Administrative Court in Warsaw (judgment of October 3, 2024, ref. III SA/Wa 1425/24) disagreed with the tax authority’s position that the total value of the acquired company’s assets constitutes taxable income when no shares or stocks are issued. The Court argued that if no shares are issued, there is no basis for calculating the acquiring company’s taxable income.
However, administrative court rulings are not uniform—some decisions have been unfavorable for taxpayers (e.g., the ruling of the Provincial Administrative Court in Wrocław on June 25, 2024, ref. I SA/Wr 104/24).
If a company plans to use the simplified merger procedure, it is advisable to request an individual tax interpretation (which will likely be negative) and subsequently challenge the interpretation in an administrative court—at least until the contentious provisions are amended.
