The Commercial Companies and Partnerships Code was amended, with effect from 15 September 2023, to allow for  short-form mergers between sister companies wholly-owned directly or indirectly by the same owner without the acquiror (successor company) having to issue new shares.

This has led to concerns if such a merger is tax-free for the acquiror under Article 12(1)(8d) of the Corporate Income Tax Act, what with the lack of share issue.

Article 12(1)(8d) provides that the acquiror earns gross income equal to the market value, determined as at the day preceding the merger date, of transferor company’s  assets received by the acquiror, to the extent such value exceeds the issue price of the shares allotted to the shareholders of the merging companies. This means income equals any “excess” market value of target’s assets compared to the issue price of the shares allotted to the merging companies’ shareholders.  A problem appears with mergers where no shares are issued (allotted) to the shareholders of the target.

The doubts as to the applicability of the above regulation to mergers with no share issuance have not been dispelled by courts.

In its judgment of 26 June 2024 (case no. I SA/Wr 104/24), the Provincial Administrative Court in Wrocław held that since the acquiror issues no shares, the entire value of the acquired assets represents the excess referred to in Article 12(1)(8d) of the CIT Act, and as such is taxable income.

In contrast, the Provincial Administrative Court in Warsaw in ruled on 10 July 2024 in case no. III SA/Wa 947/24 that, based on its linguistic construal, the relevant law does not apply to mergers with no share issuance. The reasoning was that if the law refers to asset value “exceeding” the issue price of shares, then there can be no such “excess” where no shares are issued.

From a purposive point of view, the Warsaw court’s position seems to be correct. To find otherwise could have the effect of creating a situation where mergers with no share issuance would not be used in practice as taxpayers would consider them too risky in tax terms. Be that as it may, taxpayers have to wait for the matter to be ultimately resolved by the Supreme Administrative Court. Alternatively, their concerns could be alleviated by legislative amendments or a public tax ruling from the Finance Minister which would clearly provide that a merger of sister companies without share issuance is tax-free under Article 12(1)(8d) of the CIT Act.

If this issue pertains to your business and you are interested in our assistance, please contact us.

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