Tax history of a company’s restructuring and its impact on tax neutrality of their merger

Since Poland’s accession to the EU, tax neutrality of company mergers has been a principle (unless the merger is used to avoid taxation). This principle was ensured by the so-called Merger Directive[1] and implemented by the domestic tax law.

However, the domestic rules changed in 2022 with a significant tax reform, commonly known as the “Polish Deal” (“Polski Ład”). The reform introduced some new conditions and exceptions to the tax neutrality of company mergers. Some of these exceptions concern companies that have undergone restructuring in the past.

 

Current Legal Status

As a general rule, in the case of a company merger, shareholders of the acquiring company in exchange for their shares receive shares in the company which is being acquired. This rule does not apply only in the case of simplified mergers, such as:

• the acquisition of a daughter company by a mother company (which has 100% of the daughter company’s shares);
• the merger of sister companies with the same, sole shareholder.

Before 2022, when shareholders received shares of the acquiring company, their value was generally not recognized as taxable income (it was exempt)[2].

However, since 2022, two additional conditions must be met to apply for this exemption.

One of these conditions is that the shares (stocks) in the acquired company were not acquired or issued as one of the following results:

• another merger or division of entities,
• share exchange (share swap), referring to a specific contribution of shares.

 

Historical restructuring that excludes tax neutrality of company mergers

We will discuss the actions that exclude tax neutrality of company mergers using the example of company Beta planning to merge with Delta (i.e., Delta will acquire Beta). The shareholder of Beta is the company Alfa, which previously acquired shares in Beta. However, these shares were not resulting from “entering” the company (e.g., through a capital increase or purchased on the secondary market). They were acquired as a result of previous restructuring of company Beta.

This restructuring could have taken one of the following forms:

1. Alfa contributed its shares in Gamma to Beta in exchange for shares in Beta, becoming its shareholder (so-called share exchange);
2. Beta 1 and Beta 2 merged into a new company Beta, whose shares (as part of the merger) were acquired by Alfa – one of the shareholders of Beta 1 and Beta 2;
3. Beta merges with Gamma through its acquisition. Shares in Beta are acquired by Alfa – one of the previous shareholders of Gamma;
4. Omega divided by transferring part of its assets to Beta. New shares in Beta were acquired by Alfa, among others, which held part of the shares in Omega.

In all these cases, further restructuring of company Beta, in the form of a merger with Delta, will give rise to the taxable income for Alfa. The income will be the market value of the new shares, because Alfa acquired its shares in the acquired company (Beta) as a result of the restructuring operations listed in the CIT Act. According to the above examples, these operations are:

• share exchange;
• merger by establishing a new company;
• merger by acquisition and company division.

 

Is this restriction in compliance with EU law?

As early as the drafting of the “Polish Deal” reform, experts argued that limiting the principle of merger neutrality could be in breach of EU law. This is because the Merger Directive does not condition the tax neutrality of a company merger on whether the acquired company was previously restructured[3].

Polish administrative courts also draw attention to this point. According to the judgments, provisions limiting the tax neutrality of company mergers only in relation to primary restructuring are inconsistent with the Merger Directive for two reasons:

1. the aim of the directive was not to hinder companies from undergoing multiple restructurings but to ensure that the state retains the right to tax the increase in the value of shares held by the acquired company’s shareholders;
2. according to the Merger Directive, restructurings that are not aimed at avoiding tax (or evading it) should be tax-neutral for all parties to the transaction (regardless of whether the company was previously restructured).

This was the position, among others, of the regional administrative courts in Wroclaw[4], Olsztyn[5] and Warsaw[6]. The rulings are promising but one may not yet speak of an established case law in this regard, especially since there is still no ruling of the Supreme Administrative Court in this matter.

Taking the above information into account, before making a decision about restructuring it is always worth analyzing its tax consequences, which often turn out to be a “deal breaker”. Defining the tax consequences in advance allows for the safe planning of the transaction. Therefore, if you need assistance in this area, we encourage you to contact us.

 

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[1] 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 (Official Journal of the European Union L 2019.310.34)

[2] Article 12.4.12 of the Polish CIT Act

[3] Article 8.1. and 8.2.

[4] Judgement of the WSA in Wroclaw on 20^th of December 2023 (I SA/Wr 811/22)

[5] Judgement of the WSA in Olsztyn on 28^th of June 2023 (I SA/Ol 118/23)

[6] Judgement of the WSA in Warsaw on 24^th of October of 2024 (III SA/Wa 1877/24)