Eligibility to source of revenue – increase in the share capital of the company

This Article is a case study on whether, after the increase in the share capital of a limited liability company by the formation of new shares from the agio raised in reserve capital, income to be taxed on the part of shareholders arises.

The authors discuss the facts, present their position, define the problem and indicate its solution with justification. They shall also state the position of the tax authorities and the conclusions of the case-law, including the judgments of the Supreme Administrative Court, on the issue of taxation of funds from the issue agio.

1. Facts

The shareholders of Alfa sp. z o.o. established in 201X with its registered office in Poland are Polish companies Beta sp. z o.o. and Gamma sp. z o.o. The share capital of Alfa sp. z o.o. is divided into 1,000 shares of nominal value 200 PLN each and total nominal value 200,000 PLN. Beta has a partner in Alpha.

95% shares and Gamma's associate 5% shares. Beta sp. z o.o. took over 950 shares in Alfa sp. z o.o. with nominal value 190,000 PLN in exchange for a financial contribution higher than the nominal value of the shares covered, i.e. for 490,000 PLN.

Surplus over nominal value of agio shares 300,000 PLN was included in Alfa's books as a reserve. Gamma sp. z o.o. embraced 50 shares in Alfa sp. z o.o. with nominal value 10,000 PLN in exchange for a financial contribution of 10,000 PLN.

In 201X+1 the share capital of Alfa sp. z o.o. has been increased, creating 1,500 new shares in mode Article 260 Act on 15 September 2000 – Commercial Companies Code 1 (continue k.s.h.). New shares were covered by reserve capital, with a transfer of funds from the reserve capital of 300,000 PLN for share capital. Beta's partner fell down. 1425 shares in Alfa’s increased share capital of nominal value 285,000 PLN, and Gamma's partner 75 shares of nominal value 15,000 PLN (See diagram).

1.2. Problem

When the share capital of Alfa sp. z o.o. increases, where the new shares are covered by the value of the agio-created reserve capital, does the shareholders of Beta and Gamma generate revenue for taxation resulting from the obligation on Alfa to collect advances on income tax?

1.3. Authors' position

The internal capital shift should not result in an income on the part of the partners.

1.4. Reasons

1. 4.1. The take on the basis of k.s.h.

The resolution of shareholders to amend the articles of association may increase the share capital by allocating reserve capital or reserves (funds) created from the profits of the company (increase in share capital from the resources of the company); Article 260(1) k.s.h.).

New shares are held by shareholders in relation to their existing shares and do not require the inclusion of[2].

Under this regulation, there is doubt about the increase in share capital from the funds transferred from the reserve from the issue agio (the provision refers to the ‘reserve capital measures created from the profit of the company’). The position of doctrine on this issue is divided.

According to some commentators, the share capital increase cannot be allocated to that part of the reserve capital which arose from the transfer to the surplus capital of the contribution beyond the nominal value of the shares covered, i.e.

agio[3].According to others, the claim on the necessity of the return on own funds to cover the increase does not apply to spare capital and therefore, the increase in share capital under this scheme can in particular be financed from the amount constituting agio[4].

Without prejudging this issue here, but assuming that the share capital increase in terms of Article 260 k.s.h. may be transferred funds from the reserve capital arising from the issue agio, we are faced with a dilemma whether the increase in the share capital of the company by the creation of new shares from the funds of the agio raised on the reserve capital is subject to the tax shareholder (this also applies to the increase in the nominal value of the existing shares – Article 260(3) k.s.h.).

1.4.2. Capital gains

According to Article 7b(1)(1) point (f) Act on 15 February 1992 on corporate income tax 5 (Next the Corporate Income Tax Act), The income from the capital gains shall be considered to be income from the profit of legal persons constituting revenue actually obtained from that share, including the equivalent of the profit of the legal person allocated to the increase in its share capital and the equivalent of the amounts transferred to that capital from the other capitals of that legal person.

In the legal state up to the end 2017 This regulation included Article 10(1)(4) the Corporate Income Tax Act, according to which the income from the profits of legal persons was the income actually obtained from that share, including the income of the company for the increase in share capital and the income equivalent to the funds transferred to that share from other capital of that company.

With regard to the concept of ‘revenue from the participation of legal persons’, the NSA in its judgment of 22 September 1993 6 He pointed out that the income from the share of profits of a legal person is a concept containing in its content any revenue arising from the taxpayer having the right to participate in the profits of another legal person.

It can therefore be considered that any income of taxable persons based on a legal title in the form of a share/share that is directly or indirectly financed from the profit of such persons is subject to income tax in accordance with the principles laid down for dividends and other income in the profits of legal persons.

A similar position was made by the NSA in its judgment of 20 January 2005 7 , in which he stated that the income should result from the fact that the taxpayer held a stake in another company. This provision therefore covers those revenues which remain in connection with the right to receive a share of the profits of legal persons.[8].

1.4.3. Fiscal position

Concerning the regulation under Article 7b(1)(1) point (f) the Corporate Income Tax Act (to the end 2017: Article 10(1)(4) the Corporate Income Tax Act) tax authorities present an adverse position for taxpayers.

They indicate that any increase in the share capital of a legal person from its financial resources raised in reserve or reserve capital, irrespective of the source of such funds, i.e.

regardless of whether they come from undistributed profits, profits accumulated in reserve capital, issue agio or other non-profit-making measures, gives rise to taxation on the shareholder's side (see e.g. individual interpretations of the IS Director in Warsaw from 27 January 2015, reference no.

IPPB2/415- 846/14-2/MK, Legalis; of 11 June 2015, reference no. IPPB2/4511-332/15-2/MK, Legalis and from 11 June 2015, reference no. IPPB2/4511-348/15-2/MK, Legalis)[9].

1.4.4. Conclusions of the caselaw

The positions of administrative courts are split. The view in line with the fiscal approach was presented, among others, by the WSA in Gliwice in the judgment of 11 January 2010 According to that court, there is no doubt that the legislator’s will was to tax also the funds from the issue agio.

Judgment

If the legislature itself generally considers profit participation income to be, inter alia, an income equivalent to the amounts transferred to that capital (undertaking) from other capitals, there is no basis for excluding from the scope of this concept the funds transferred from the reserve or reserve capital of the company (regardless of their origin) [so also the NSA in its judgments of 20 January 2005, reference no.

FSK 1065/04, Legalis and of 23 June 2006, reference no. II FSK 956/05, Legalis – author's dop.]. Moreover, it cannot be considered that ‘the income actually obtained from the share’ derives from the shareholder’s profit, but is due to the fact that he holds shares (shares) of the company.

This arrangement confirms the treatment by the legislature on an equal basis with the shareholders' income of the company's own resources, transferred to share capital or share capital from other capitals of the company [cf. the judgment of the WSA in Szczecin from 13 September 2007, reference no.

I SA/Sz 29/07, Legalis – author's doc.]; judgment of the WSA in Gliwice from 11 January 2010, reference no. I SA/Gl 518/09, Legalis.

Another interpretation of the contested regulation was presented, among others, by the NSA in Krakow in a judgment of 5 July 2002 According to that court, the way in which the provision was formulated indicates that the legislator’s will was to tax only the funds transferred to share capital from other profit-making capital.

Judgment

If the legislator used the words “in this”, indicating that it contained what follows within the meaning of the earlier general definition, it was not his will to extend this definition of profit participation, but merely to clarify it.

The wording after the words ‘including’ must therefore not lead to a tax obligation being extended to non-profit revenues of the legal person.

Therefore, the term ‘including’ should be understood as referring to the term ‘actually obtained’, which means, in particular, that those benefits constituting a participation in the profit of a legal person, which represent the equivalent of the amounts transferred from the other capitals of a legal person to its share capital, are actually also received.

Consequently, the wording Article 10(1) the Corporate Income Tax Act does not give rise to the taxation of the funds transferred from the reserve or reserve capital of the company to share capital in a part that does not constitute the profit of that person and is collected, for example, from the so-called issue agio (excl.

NSA in Kraków from 5 July 2002, reference no. I SA/Kr 1625/00, Legalis).

It should be accepted that the funds from agio transferred from the company's spare capital to increase its share capital do not constitute income (income) from the shareholder's share of profits.

The argument that part of the provision starting with the words "including" is the clarification of the initial part of the provision (the income from the share of profits of legal persons is the income actually obtained from that share), deserves our opinion that it is acceptable as a corresponding linguistic interpretation.

If the intention of the legislator were to tax the transfer to share capital of resources from reserves other than profit, he would use the term ‘over’ instead of ‘including’.

1.4.5. Income actually obtained from participation

In addition, the use of the term "profit actually obtained from participation", in our opinion, indicates that the concept of this income should be referred to the actual (definitive) asset delivery on the part of the partner.

The shareholder contributing to the share capital does not obtain income, so why the shareholder contributing the funds first to the share capital and then to the share capital would receive income (income).

In the judgment of 19 September 2001 10 The NSA confirmed that the use of the word "actually" undoubtedly means that it is a real income rather than just a hypothetical one. Without an asset to the shareholder, it is impossible to talk about the income from the participation of legal persons.

The value of the shares should therefore be taxed only at the time the shareholders actually realise their income, i.e. at the time of the disposal of those shares. Similarly, other commentators view the issue, also pointing to the ratio legis of tax rules.

The company could immediately issue shares with a nominal value corresponding to the issue value (corresponding to the actual nominal price and agio). The share capital would then be increased immediately by a value including the nominal price and agio, but this would not give rise to a tax obligation on the part of shareholders.

However, there are no reasonable grounds for differentiation under tax rules two how to increase the company's share capital[11].

The Supreme Administrative Court has recently expressed the view that the income (income) from the proceeds of the profits of legal persons includes all the benefits which arise as a result of the rights of the taxpayer to the profits of the legal person and which it has actually achieved.

In general, the legal basis for obtaining income from that source is the legal title to the capital of the legal person.

Therefore, the payment of capital from the capital (foreign) to the applicant – a Polish company – should be classified as income from the share of profits of legal persons on the basis of Article 10(1) the Corporate Income Tax Act Therefore, the main reason for identifying the benefit in question as income (income) from the participation of legal persons is the legal title to the capital of the legal person.

This concept covers all benefits arising from the taxpayer having rights to participate in the profits of a legal person and which have been "actually" achieved by the taxpayer[12].

1.4.6. Determination of tax

Income tax (revenue) on the share of profits of legal persons established in Poland is equal to 19% the income obtained and the tax payer is that legal person – i.e. Alpha sp. z o.o. (Article 22(1), Article 26(1) the Corporate Income Tax Act). In the event of an increase in share capital from the resources of the company, income on the side of shareholders (Beta sp. z o.o. and Gamma sp. z o.o.) arises on the date of entry into the KRS of the increase in the share capital of Alfa (Article 12(1b)(2) the Corporate Income Tax Act). Recognising that in the situation described on the side of partners Beta and Gamma generated income from the share of profits of legal persons, Alfa sp. z o.o. should within the 14 the days after the decision of the registration court to enter into an alert for an increase in share capital has been approved, the tax of:

• 1) in the case of partner Beta: 285,000 PLN × 19% = 54,150 PLN,
• 2) in the case of a Gamma associate: 15,000 PLN × 19% = 2,850 PLN.

Alpha should therefore require the shareholders of Beta and Gamma to pay it the equivalent of tax (Beta – 54,150 PLN, Gamma 2,850 PLN), which she then transferred as a payer to the tax office. The tax should be transferred to the tax office applicable to taxpayers (i.e. shareholders Beta and Gamma) within the time limit 7. on the day of the month following that in which it was taken. According to the amendment, introduced by the Act of 23 October 2018 amending the Personal Income Tax Act, the Corporate Income Tax Act, the Act - Tax Ordinance and some other laws 13 , from 1 January 2019 in the case of a profit of a legal person intended to increase its share capital or the amounts transferred to share capital from other legal person’s capital (Article 7b(1)(1) point (f), the tax is transferred to the tax office responsible for the payer. By this date, the payer is also obliged to send the Polish resident taxpayers (shareholders) information on the amount of tax collected CIT-7 14 . In time to end first the month of the year following the tax year in which the obligation to pay the tax arose, the payer (Alpha) shall forward to the tax office responsible for taxpayers (Beta and Gamma) the annual declaration CIT-6R[15]. With regard to Associate Beta, tax exemptions may be found. According to Article 22(4) and n. the Corporate Income Tax Act income tax revenue is exempt from participation in corporate profits, which include: Under Article 7b(1)(1) point (f), where the following cumulative conditions are met:

• 1) paying income on the share of profits of legal persons is a company which is a taxable person of income tax established or managed in Poland (here Alfa sp. z o.o.);
• 2) A company that is subject to a tax on income in Poland or in another EU Member State other than Poland or in another EEA State, regardless of its place of income (here Beta sp. z o.o. based in Poland);

1. the company obtaining income has directly continuously for at least a period 2 years not less than 10% shares in the capital of the company paying it, and this ownership is due to ownership (Beta sp. z o.o. holds 95% shares in Alfa sp. z o.o. — this condition is also met if the period 2 years of continuous holding of shares (shares) expire after the date of obtaining income (in 201X+1 r. Beta holds shares in Alpha for a period shorter than 2 years, so before the end of this period it may leave at most 85% shares, keeping the minimum required 10%). In case of non-compliance with the condition of holding a share (share) directly at least 10% continuously for a period 2 years Beta sp. z o.o. would be liable to pay tax, including interest on late payment, of 19% revenue to 20. the day of the month following that in which she lost the right to be released. Interest would be charged from the day following the day on which she benefited from the exemption (Article 22(4b) the Corporate Income Tax Act);
2. the company obtaining income does not benefit from the tax exemption on all of its income, regardless of the source of the income (a written declaration needed; Article 26(1f) the Corporate Income Tax Act).
3. 4.7. Summary

The transfer of funds between the capital (agio) and the share capital does not lead to a shareholder's participation in the profit of the company, but only to a different accounting treatment of those funds. The partner does not receive any real delivery. Furthermore, it only recovers what it has previously put into the company.

The transfer of funds from the reserve to the share capital has the effect of subjecting that part of the company's assets to a more restrictive legal regime to perform the guarantee function of the share capital; the issuance of new shares may lead to a decrease, rather than an increase in the market price of the asset.

The introduction of taxation of such internal capital transfers does not in fact imply a tax liability for the shareholder’s profit. However, should it be considered that taxable income arises, a tax exemption may be applied to a shareholder of Beta.

Gamma's partner should pay the company the amount of tax to be transferred by Alfa to the competent tax office.

Legal basis

Article 260 k.s.h., Article 7b(1)(1), Article 10(1), Article 12(1b)(2), Article 22(1) and (4) and n. Article 26(1)(1f)(2)(3), Article 26a the Corporate Income Tax Act

__________________________________________________________________________