Financing of the company by shareholders by increasing share capital, subsidies and loans and tax consequences

Where a company cannot or does not want to use external sources of financing, such as credit, then the solution may be to supply it by shareholders. It may raise funds from them by increasing share capital, imposing subsidies on shareholders or borrowing from them to the company. The choice of the method of co-financing often depends on the amount that the company needs to obtain and the purpose for which it wants to allocate it. What are the tax consequences in these situations?

Introduction Where partners want to supply the company with no return, they decide to increase share capital. Then the funds transferred are transferred to the ownership of the company and the partners receive new shares in return. This form of co-financing requires many formalities and results only after registration of the capital increase in the National Court Register (hereinafter KRS). It should be used first of all when the company plans to develop and needs funding in a wider and longer term.

The subsidy increases the resources of the company, but is temporary and the company is obliged to reimburse them. It should be remembered that the company can only claim contributions from shareholders if the company's contract so provides. It must also result in the amount of aid imposed.

Payments must be made in accordance with the provisions of the Commercial Companies Code[1]. Thus, the company cannot impose any liability on its shareholders, but the principle of proportionality must be maintained, i.e. each of them making a share corresponding to the size of its shares. The payment of subsidies is also formalised.

The principle is that subsidies are refundable and therefore only provide temporary funding.

The least formalised and cheapest way to raise funds is to borrow from a partner. This method of funding does not require any particular form. However, these measures, as indicated in the loan agreement itself, must be reimbursed by the company. In addition, the company will bear interest on the loan. Therefore, the financing of the company in the form of a loan will be more profitable when the company needs ad hoc financial support.

Financing of the company by increasing the share capital

The increase in share capital allows to raise funds for the development of the company or replace external sources of financing (e.g. credit) with the resources of shareholders. According to the provisions of k.s.h., partners may increase share capital on two methods:

• 1) on the basis of the previous provisions of the Company Agreement,
• 2) by amending the articles of association.

In both of these cases, either the number of shares increases, while maintaining their nominal value, or the nominal value increases without changing their number. The increased capital may derive from the profit generated by the company either from contributions made by shareholders to cover new shares or from the increased value of the shares.

In order for partners to be able to increase share capital on the basis of the provisions of the articles of association governing this matter, the articles of association must include:

• 1) authorising an increase in share capital without changing the articles of association,
• 2) determining the maximum increase in share capital,
• 3) indicating the date of the increase.

The provisions of the articles of association relating to the increase in share capital may be as follows: 31 December 2018 the share capital of the company may be increased up to

80,000 PLN without amending the company’s agreement.

If there is a provision in the articles of association for the possibility of increasing the share capital, it is sufficient to carry them out by a resolution of the meeting of shareholders, in principle taken by an absolute majority.

If the existing provisions of the articles of association do not provide for an increase in share capital, it is necessary to amend the articles of association. To this end, the Management Board shall convene a meeting of shareholders at which the partners shall adopt a resolution by a majority 2/3 votes[2]. A resolution on the amendment of the company's share capital increase agreement must be taken in the form of a notarial act.

The resolution on the increase in share capital should specify:

• 1) height of increase,
• 2) the number of newly established shares and their value (or new value of the shares) where the increase occurs by increasing the nominal value of the existing shares,
• 3) how the increased share capital (cash or non-monetary contributions) will be covered,
• 4) persons comprising shares in the increased share capital (name, address, identity card number, PESEL).

Shareholders may contribute to increased share capital in monetary or non-monetary (portable) form. The form of covering the contributions will be relevant in the tax settlement of the share capital increase.

The increase in the company's share capital requires the following actions:

• 1) the adoption by the shareholders of a resolution on the increase in share capital,
• 2) the acquisition by them of shares in the increased share capital,
• 3) contributions by shareholders to the provision of increased share capital,
• 4) Incorporation by the board of directors of an increase in share capital to the KRS.

It should be borne in mind that the partners effectively include shares in the increased share capital of the company z o.o. at the time of registration of the increase in KRS, then there is an increase in share capital. In addition, the capital increase should be announced in the Court and Economic Monitor.

If the new shares in the share capital increase are to be covered by a non-monetary contribution (port), then the provisions on non-monetary contributions applicable to the establishment of the company should be applied. This means that new shares should specify:

• 1) which is the subject of the contribution,
• 2) the name of the importing partner (name) and
• 3) the number and nominal value of the shares in exchange.

If the new shares arising from the increase in share capital are to be covered by aport, then there is always a change in the articles of association, even if the articles of association specify the maximum amount of the share capital increase and its deadline. Partners must therefore meet at a meeting and adopt a resolution in the form of a notarial act. The majority then applies 2/3 votes (unless the articles of association provide for stricter terms).

The Management Board is required to declare an increase in share capital to the registry court[3]. However, before it does, the contributions to the capital increase should be made in full[4]. All board members are required to make a statement that this has happened. If they have, intentionally or by negligence, false data, they are jointly and severally liable to the creditors of the company by 3 years from the date of registration of the share capital increase.

When submitting an increase in the share capital to a registered court, the Management Board shall accompany this document:

• 1) a resolution on the increase in share capital,
• 2) statements by shareholders of the participation in the increased share capital,
• 3) a statement by all board members that contributions to the increased share capital have been made in full.

Increase in share capital — income tax

The increase in share capital and the coverage of it in cash from the point of view of income tax is tax-neutral. The value of the cash contributions does not constitute income for the company. According to Article 12(4)(4) Act on 15 February 1992 on corporate income tax (hereinafter:[5], revenue shall not include revenue received to create or increase share capital. Thus, an increase in the share capital of a capital company will not result in corporation tax revenue in such a company.

Share capital must be increased correctly, i.e. according to the provisions of k.s.h. If the increase is carried out contrary to these provisions, then the company’s money received in this respect must be included in the revenue as an unpaid taxable benefit together with other revenue.

The company, which decides to increase share capital, must expect expenditure such as: tax on civil law acts, court fee or notarial tax. The expenditure incurred by the company in connection with this increase in share capital cannot be included in the costs of obtaining the company's revenue, as it relates to revenue which is excluded from the taxable tax revenue.

In accordance with the resolution of the Supreme Administrative Court[6]: only expenditure relating to the issue of new shares without which the share capital cannot be increased by the public limited company is not the cost of obtaining revenue according to the rules expressed in the content Article 12(4)(4) and Article 7(1)(2) ed.o.p.

in the above mentioned Article 15(1) U.P.D.o.p. This kind of expenditure undoubtedly includes notarial fees, court fees, tax on civil acts (...). Other expenditure, constituting the general costs of the operation of a capital company, shall constitute, in accordance with Article 15(1) u.p.d.o.p., revenue costs’.

Tax effects on shareholders

At the time of taking shares in exchange for a financial contribution, the shareholders shall also not generate income on the side of those shareholders.

It is only at the moment when, for example, they sell the shares covered by the contribution, that they are required to withdraw the tax and make a tax return. However, if the partners include shares for a non-monetary contribution (e.g.

real estate, machine, asset other than the undertaking or its organised part), then the income from this will arise at the time of the acquisition of the shares and will correspond to the value of the contribution specified in the statutes or in the articles of association and, in the absence of the value of the contribution specified in another document of a similar nature, not less than the market value of such contribution[7].

The income tax on the acquisition of shares in the limited liability company by shareholders who are natural persons in exchange for a non-monetary contribution shall be 19% income (Article 30b(1) This income shall be determined in accordance with Article 30b(2)(5) u.p.d.o.f. – is the difference between income determined according to Article 17(1)(9) u.p.d.o.f. and costs determined on the basis of Article 22(1e) u.p.d.o.f.

The value of the contribution in exchange for a non-monetary contribution in a form other than an undertaking or its organised share of the shares in the case of a legal person shall also be the value of the contribution specified in the statutes or the articles of association and, in the absence of such contributions, the value of the contribution specified in a similar document of a similar nature not less than the market value.[8].

In addition, an increase in share capital may be made from the resources of a capital company. The share capital of the company can be increased by transferring from the reserve capital created previously from the profit of the company. This situation is neutral for such a company in terms of corporate income tax legislation. However, such an economic operation is not neutral to the shareholders of this company.

It should be noted that from 1 January 2018 Capital gains revenue has been separated as a separate source of revenue[9]. Therefore, as income from capital gains, according to Article 7b(1)(1) point f u.p.d.o.p. is considered equivalent to the profit of a legal person intended to increase the share capital.

As regards partners who are natural persons, according to Article 24(5)(4) u.p.d.o.f. as the income of shareholders of a capital company shall be considered, inter alia, the income allocated to the increase in its share capital and the equivalent of the amounts transferred to the share capital of such company from other capital (funds).

Both income tax laws (u.p.d.o.p. and u.p.d.o.f.) determine the rate of that tax at which 19% revenue obtained by an associate. This is due to Article 22(1) U.p.d.o.p. and, respectively, Article 30a(1)(4) u.p.d.o.f.

The shareholder (natural person), which includes shares in exchange for a non-monetary contribution, is required to demonstrate the income resulting from this (Article 30b(6) u.p.d.o.f.) in the testimony PIT-38.

If he is a natural person and has made a non-monetary contribution to the company in the form of an undertaking or part thereof, then his income is exempt from income tax up to the nominal value of the shares in exchange for aport (Article 21(1)(109) u.p.d.o.f.).

The increase in share capital is, in principle, subject to tax on civil acts. However, it is worth checking whether there will be conditions for the application of the PCC exemption resulting from Article 9(11) Act on 9 September 2000 on tax on civil law acts[10] (Further u.p.c.c.). The PCC height is 0.5% the value by which the company increased its share capital. As previously stated, this would not be the cost of obtaining revenue as the capital increase does not constitute the company's income.

Subsidy to the company by making payments

The funds necessary for the company's activities can also be obtained through the payment of subsidies by shareholders. The aid, although increasing the company's assets, does not increase the shares of individual shareholders and thus does not increase the share capital.

The payment of aid does not require a formalised procedure as an increase in capital. They are contributions of temporary partners. Their effect is to increase the company's own resources, which positively affects its financial image. The funds thus obtained may be allocated to any purpose.

Capital aid has been regulated Article 177-179 k.s.h. They are contributions to a company which are purely monetary, which, by their nature, do not constitute contributions of shareholders to the company to cover their shares, and thus do not increase the share of shareholders in the company, and consequently do not increase the share capital (unless they are credited with an increase in that capital at their return – in accordance with the procedure provided for in k.s.h.), but provide spare capital, unless they are used to compensate for uncovered losses incurred in previous years.

The subsidies correctly passed by the assembly of shareholders give the company the right to claim their payment from shareholders. If the shareholder has not paid the aid on time, then the company has the right to require him to pay statutory interest for the period of delay and to make good the damage suffered by it.

The amount and date of the payment shall be decided by the meeting of the partners.

The resolution on this matter is taken by an absolute majority, unless the articles of association otherwise regulate the matter (for example, it may provide for unanimous adoption of decisions on the payment of subsidies, which protects minority shareholders who are not always ready to pay additional funds).

Therefore, the amount and date of the payments shall be determined by the meeting of shareholders in the form of a resolution. The determination of the amount and date of the payments by another body of the company and in any other form is not acceptable.

Where the articles of association do not provide for subsidies and the partners wish to make them, they must change the articles of association in advance by introducing appropriate provisions. The Management Board shall register this amendment with the KRS.

Subsidies should be imposed and paid by shareholders evenly to their shares (e.g. percentage ratio). The amount of the aid must not be differentiated because of the share. The aid granted shall not exceed the limit laid down in the articles of association.

The company which makes partial repayments must reimburse them to each of the shareholders in proportion to the shares held in the company.

Payments and income tax

The subsidies do not constitute tax revenue on the part of the company, but only if they have been paid on the terms laid down in k.s.h. Capital aid, according to Article 12(4)(11) U.p.d.o.p., are not included in the revenue to be taxed, provided that they have been paid in the mode and on the basis of the rules laid down in K.s.h., and therefore where:

• 1) the payment obligation arises from the company’s contract,
• 2) the amount of the aid specified in the resolution of the shareholders does not exceed the limit resulting from the articles of association,
• 3) The aid was imposed on shareholders in accordance with the principle of proportionality of the amounts paid up to the size of the shares of the individual shareholders.

If the aid is paid in breach of any of the above conditions, the company is obliged to charge the amounts received to revenue and tax them. This position is also based on the NSA judgment[11], according to which the sums received by the company from its shareholder constitute subsidies.

However, they are taxable income because they are not covered by the exemption provided for in Article 12(4)(11) u.p.d.o.p. This provision provides that revenue does not include payments paid to companies if they are made in accordance with and under the conditions laid down in the separate rules.

These subsidies do not meet the requirements of k.s.h.

If the aid is granted under Article 12(4)(11) u.p.d.o.p. were excluded from the revenue taken into account in determining taxable income (Article 7(3) (u.p.d.o.p.), expenditure incurred in connection with their payment, as costs directly related to revenue, cannot constitute revenue costs within the meaning of Article 15(1) u.p.d.o.p.

This position was confirmed by the NSA in its judgment[12], stating that ‘a tax on civil law activities paid by a company with a capital contribution by shareholders does not constitute the cost of obtaining income from that company within the meaning of Article 15(1) u.p.d.o.p.’

At the same time, subsidies are not for shareholders at the expense of obtaining revenues, which is clearly defined in the order Article 16(1)(53) u.p.d.o.p., according to which the cost of obtaining the income of the subsidies referred to in Article 12(4)(11) u.p.d.o.p., and their return.

The tax-neutral reimbursement will also be on the part of both companies and partners.

Tax neutrals are only interest-free subsidies that occur most frequently. If, on the other hand, the partners have adopted a resolution stating that, in the event of reimbursement of the subsidies paid by the shareholders, they will be remunerated, the tax neutrality shall be modified.

Uninterested subsidies to the company made in accordance with the provisions of k.s.h. are not free of charge. An institution of payments is an intermediate between a contribution to share capital and a simple loan. The subsidies are of a legal nature similar to the shares as they actually increase the company's assets.

However, they differ in their ability to be repayable and do not increase the share capital of the company.

The payment of subsidies comes from the provisions of k.s.h., and the articles of association may impose such an obligation on all shareholders – this interest-free payment is not, in principle, an unpaid payment of shareholders to the company.

The making of the capital contribution, as well as the granting of a loan by shareholders to the company and the making or increasing of the contribution to the company (the value of which results in an increase in share capital) is subject to tax on civil acts as a modification of the company’s contract, in accordance with the regulations Article 1(1)(1) point (k) and point 2 and Article 1(3)(4) u.p.c.c.

Obligation to pay tax in the event of pregnancy payments per company[13].

The payment of a tax on civil law (surcharge) is therefore directly related to the payment of subsidies by the shareholders of the company – it is necessary for such an operation to be carried out. Therefore, PCC will not be included in the cost of obtaining income in income tax. The basis for the taxation of PCC on subsidies is the value of the aid paid in accordance with Article 6(1)(8) (c) u.p.c. The subsidies paid to the company are taxed on PCC on the same basis as the capital increase. of the company.

Co-financing of the company through a loan from a shareholder

The company may also be co-financed by its shareholders with loans. The loan granted to the company constitutes an asset for it, but it is not definitive. The loan agreement requires the debtor (the borrower), in this case the company, to reimburse the amount received.

The provisions of k.s.h. and the Act of 23 April 1964 Civil Code[14] ((c) do not provide for any specific form of borrowing agreement between the shareholder and the company. Therefore, this agreement can be concluded in any form, but for evidence reasons it is best to draw it up in writing. The loan agreement should include standard elements, i.e. the amount of the loan, the amount of its interest rate and the terms and dates of repayment.

The Civil Code does not require the loan to be remunerated, but the lack of interest will have tax consequences.

Where a shareholder, when granting a loan to a company, does not charge interest, the tax authorities shall treat this situation as a company's advantage and the absence of interest rates shall consider the shareholder's benefit to the company free of charge.

Consequently, the company will be charged the taxable income for the unpaid benefit of interest which the company would have to pay using a commercial loan.

The income of the company for the unpaid benefit arises on the basis of Article 12(1)(2) u.p.d.o.p. on the date of the acquisition of the asset, i.e. on the date on which the funds (granted under the loan) were put at the disposal of the company.

Therefore, on the date of receipt of the loan, the company (the borrower) should charge the interest it would have to pay if the loan had been remunerated. Interest should be similar to interest granted at market conditions.

This is what he stressed in his NSA judgment[15], stating that ‘interest on loans granted to the company by its shareholders must be similar to the bank interest and only such may constitute the cost of obtaining income in income tax’.

The adoption of a civil-law point of view on the interest rate on loans in the interpretation of the provisions of u.p.d.o.p. must not lead to the tax evasion of the entity concerned.

If the company borrows from its shareholders to avoid a dispute with the tax, it is safe to set an interest rate similar to the average interest rate applied by the banks.

Settlement of loans and interest and tax effects

The amount of the loan is tax-neutral. On the company's side, it does not constitute revenue because the loan is repayable and is excluded from the revenue catalogue. The transfer of funds under the loan agreement is not a definitive delivery to the borrower and therefore does not constitute tax revenue. According to Article 12(4)(1) U.p.d.o.p. revenue shall not include loans received or reimbursed.

On the other hand, on the part of the shareholder (borrower) the granting of the loan does not constitute the cost of obtaining revenue.

In the event of repayment of the loan to the shareholder (borrower), the capital will not be an income for him and for the company (borrower) will not be at the expense of obtaining revenue[16].

If the shareholder decides to surrender the loan to the company, then at the time of redemption the company will reach taxable income of the amount of the loan.

Interest on the loan, unlike the amount of the loan, is definitive and is not tax neutral. The interest on the loan granted to the company by the shareholders is the cost of obtaining revenue for the company. However, the cost of obtaining income is not calculated but not paid interest on loans on the basis of Article 16(1)(11) u.p.d.o.p. Thus, interest on loans is at the expense of obtaining income when they are paid.

On the other hand, on the partner's side, there is income that should be added to its revenue and taxed.

Mechanism limiting the possibility to charge interest on debt to tax costs

From 1 January 2018, following the entry into force of the Act of 27 October 2017 amending the Personal Income Tax Act, the Corporate Income Tax Act and the Flat-rate Income Tax Act on certain revenues generated by individuals[17], the provisions on the calculation of the interest limit on loans/credits that may be at the expense of income (so-called debt financing costs) have changed.

Rules on thin capitalisation, i.e. Article 16(1)(60)(61), Article 16(6)(7b)(7g)(7h) u.p.d.o.p. has been repealed and applicable from 2015 Article 15c u.p.d.o.p. (concerning the so-called alternative method) has a new wording.

For loans granted and transferred to 31 December 2017 Fine capitalisation rules (Article 16(1)(60)(61) and section 6 and 7b and 7g and 7h u.p.d.o.p.) or the so-called alternative method resulting from Article 15c u.p.d.o.p. as applicable to 31 December 2017 However, the old rules shall apply to these loans no longer than to 31 December 2018

Summary

In the revised rules, the limitation of interest to costs is not in principle linked to the criterion of the existence of links between operators as a condition for the application of regulations Article 15c u.p.d.o.p., which was previously the essence of thin capitalisation.

The interest reduction mechanism already applies not only to intra-group debt financing but is mandatory for interest on all loans granted to the taxpayer, including external institutions (e.g. banks). The cost of debt financing constituting the cost of obtaining revenue shall be determined on the basis of the EBITDA, the tax cost limit being: 30% × EBITDA.

Currently, the grant of a loan by a shareholder to a capital company is no longer treated as a modification of the company's contract but is subject to taxation as a loan agreement. However, the loan granted by the shareholder to the company with an o.o. is exempt from PCC and therefore the company will not pay the tax[18].