Port of claims to a capital company

This article is devoted to changes introduced under income taxes in respect of the transfer of claims to a capital company. They concern the determination of the cost of obtaining income on the delivery of own claims and form part of a long dispute between taxpayers and tax authorities in this respect. What was the position of the jurisprudence of the tax authorities and what changed in the legal state after 1 January 2019?

1. Taxation of aport on the basis of corporation tax and of natural persons

From the perspective of income tax, asset transfer to a capital company is taxed on the aporter under the same conditions as asset sales. Of course, in this case, instead of the price paid in cash or in kind, shares are issued for the transfer of assets.

The exception is the aport of an undertaking or an organised part thereof which is neutral, i.e.

it is not taxed on the aporter and at the same time does not lead to an increase in the cost base/mortgage base in the aport recipient company, the principle of continuing the cost base/mortgage base (Article 12(4)(25) point (b) and Article 16g(9)(10a) Act on 15 February 1992 on corporate income tax – further the Corporate Income Tax Act 1 and Article 21(1)(109) and Article 22g(12)(14a) Act on 26 July 1991 on income tax on individuals – hereinafter referred to as u.p.d.o.f.2).

It should also be borne in mind that, under corporate tax, income from the acquisition of assets is a source of capital gains.[3]. For personal income tax, this is income from cash capital[4] or business income[5] – Depending on the circumstances and nature of the assets transferred (e.g.

income from the transfer of the business-related claims will qualify for this second categories).

Aport is taxed and it is therefore necessary to determine what constitutes tax revenue and how the cost of obtaining income should be determined.

In this case, the tax revenue is the value of the contribution as defined in the statutes or in the articles of association (or other documents) — if the value of the contribution has not been determined or is set at a level lower than the market value, the revenue is the market value as determined on the date of transfer of ownership of the object of the contribution[6].

The rules provide that income should, in principle, be recognised when the capital increase is registered[7]. It should be noted that if the value of the contribution is lower than the market value, then the tax authorities may estimate the revenue from this, as in the case of a standard sales transaction between related parties.

One might mention that to the end 2016 the provisions when determining the amount of income referred to the nominal value of the shares issued. This raised a number of doubts, in particular in the case of a share capital and reserves transfer, and raised questions about the possibility for tax authorities to estimate revenue in excess of the value of the shares issued.

The arrangements for determining the cost on the delivery depend on the type of assets transferred. In general, according to the current legislation, the cost is the expenditure incurred for the acquisition or production of non-current assets or of the NPV (not previously included in the cost of obtaining income) or the net tax value of the fixed assets or of the NPVs to be carried forward (Article 15(1j) the Corporate Income Tax Act and Article 22(1e) u.p.d.o.f.8).

2. Port of claims

The subject of the claim may also be the claim – both the claim itself and the claim acquired from the entity third. Under the general rule in this case, the transferor should recognise the income of the market value of the claim lodged[9]. Undoubtedly, he should also recognize the appropriate cost of obtaining income. Unfortunately, there have long been disputes between taxpayers and tax authorities.

3. Legal status to 31 December 2018

To 31 December 2018 provisions of tax laws — except for the case relating to the transfer of loan claims to an innovative entity[10] – they did not explicitly regulate the way taxpayers determine the income tax costs of obtaining income in cases where the contribution is due.

The cost-recognition provisions were expenditure on the acquisition of the object of a non-monetary contribution, which meant that the cost of the acquisition of the claim should be recognised as a cost for tax purposes in the case of its delivery (the other issue was that it was problematic to recognise the loss on the acquisition of such a debt).

Greater problems arose when the subject of the claim was own debt, i.e. not the claim acquired from another entity, but the claim arose from the transferor (e.g. commercial debt for the supply of goods or services, loan receivable for the granting of the loan, etc.).

Although there were arguments that in this case the acquisition should be understood as ‘created’ by the provision of services/delivery of goods (tradeability) or the issue of money (loans), such a position was not accepted by either tax authorities or administrative courts[11].

Example

The taxpayer lent the subsidiary 100 PLN. On this amount, interest accrued in the amount of 10 PLN, which led to the taxpayer's claim towards the subsidiary being 110 PLN. The taxpayer then decided to bring the claim into that company by raising the share capital by 110 PLN (the market value of the claim was equal to its nominal value).

As a result, the taxpayer recognised income in connection with the supply of 110 PLN. From an economic point of view, the principal amount of the claims of 100 PLN should represent its cost (as this value represents the money spent) and taxation should be subject only to the value of accrued interest.

However, according to the negative approach of the authorities, the taxpayer could not recognise the cost and should therefore be subject to taxation 110 PLN.

From a systemic point of view, the position of the authorities and courts was unfounded, as it is clear that such claims are not ‘created’ costlessly.

Their rise involves a real/actual loss/depletion in the taxpayer's assets, which should enable him to recognise the cost (more than that, the commercial claim was taxed revenue at the time of its formation, so refusing to recognise the cost at its delivery caused it to tax twice).

In the interests of the taxpayer, the changes made under the Law of 29 August 2014 amending the Corporate Income Tax Act, the Personal Income Tax Act and certain other laws[12], which entered into force 1 January 2015 This amendment indicated that the cost is the expenditure incurred on the acquisition or production of the asset transferred (which is not a permanent measure or a WNiP).

This further justified allowing the possibility to recognise the cost in the case of own claims.

Unfortunately, also under these provisions, tax authorities sometimes held a negative position, limiting the concept of manufacturing to the “physical” production (production) of assets – see the individual interpretation of the IS Director in Warsaw from 21 January 2016[13]. Fortunately, judicial jurisprudence favoured an interpretation beneficial to taxpayers, and part of tax authorities' interpretation also went in this direction[14].

4. Legal status 1 January 2019

From 1 January 2019, by law of 23 October 2018 amending the Personal Income Tax Act, the Corporate Income Tax Act, the Act - Tax Ordinance and some other laws[15] provisions have been introduced which provide that the cost is[16]:

• 1) the value corresponding to the amount of the loan/credit that was transferred by the contributor to the payment account of that company (but not higher than the market value of the contribution to that loan/credit),
• 2) the value of the debt in the part previously included in the revenue due — if the non-monetary contribution is the subject of the debt previously included in the income of the contributor.

The above provisions confirm the possibility to recognise costs in the case of own claims. Referring to the above example, in the case of a claim of value 110 PLN the taxable person will be entitled to recognise the cost of 100 PLN and taxation will be subject only to accrued interest of 10 PLN. In view of the judicial case-law developed prior to the introduction of the above provisions, there is a need for clarification.

In other words, the introduction of these provisions from 1 January 2019 does not mean that this possibility did not exist before. In the case of loans receivable, the provisions allow for the recognition of the cost of the nominal value. This means that the value of the accrued interest cannot be at the expense of the interest.

This seems appropriate because such interest is not a real expense nor has it previously been recognised as due income. In addition, it should be noted that the literal wording of the provisions Article 15(1j)(2a) the Corporate Income Tax Act and Article 22(1e)(2a) and section 1ea point 1 u.p.d.o.f.

appears to restrict their application to loans or loans granted to the company to which the aport is transferred.

This is not justified and may constitute an omission of the legislature, as it may well be the subject of a claim on a loan claim against an entity third – in this case, the claimant should also be entitled to recognise the cost.

According to the authors, it should be possible on the basis of Article 15(1j)(3) the Corporate Income Tax Act and Article 22(1e)(3) u.p.d.o.f. talking about the cost of producing an aportable asset. In addition, provisions Article 15(1j)(2a) the Corporate Income Tax Act and Article 22(1e)(2a) and section 1ea point 1 u.p.d.o.f.

explicitly refer only to loans and loans, while they should also cover other debt instruments, such as bonds. In this context, in order to identify the cost, it is also appropriate to refer to the cost of producing the asset.

For claims not constituting a loan or a loan, provisions Article 15(1j)(2b) the Corporate Income Tax Act and Article 22(1ea)(2) u.p.d.o.f. allow the cost to be recognised when the claim was recognised as an income due to the contributor – up to the amount of that income.

As a general rule, the income payable will be commercial claims for the supply of services and goods (they are recognised as revenue due at the time of the service or delivery of the goods). The situation will be different in the case of claims from titles from which income arises on a cash basis, for example from contractual penalties.

In respect of such claims, it will not be possible to recognise the cost as they were not previously recognised as due income.

In addition, it should be noted that the limitation of the cost to the amount of revenue previously recognised means that the cost will be the net liability (i.e. without VAT due). Such an approach is consistent with the cost-recognition rules for the standard sale of claims. To the end 2017 Whereas the rules on the sale of claims did not specify this issue, but judicial jurisprudence largely held that the cost of selling claims was their gross value, i.e. including VAT due[17].

In response, the legislator, by virtue 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[18], changed the regulations from 1 January 2018, clearly stating that only their net value is at the expense of selling the claim. The same principle is reiterated in the above-mentioned rules on the recognition of the cost of the claim.

5. Fetch claims by offsetting

In the case of claims against the company in which we want to raise capital, there are two the means of covering the capital increase by the claim in question. first the method is that the claim in question is the subject of a non-monetary contribution.

According to second the way in which the capital may be raised in cash and then the shareholder's commitment to cover the cash increase is deducted from his claim on the company. Effectively, both ways lead to a similar effect.

Non-monetary contribution is slightly more complicated legally, therefore it is very often used second the method, i.e. increase in cash capital and set off against the company.

Although in this case it is not a classic non-monetary contribution, the practice of tax authorities and judicial jurisprudence aligns this operation for tax purposes with that of non-monetary contributions[19]. In other words, the tax effects should then be determined by analogy with the situation of a non-monetary contribution in the form of receivables

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