Tax effects of divestment

The economic reality is that the company is often divested as a whole or part of it, so before the transaction takes place, it is important to consider the tax effects of the activity. Indeed, it happens that the sales contract covers the whole company or its individual components. The following article addresses the main issues related to the transfer of ownership of the company and the consequences of this activity under tax law.

1. Definition of the company

The legislator in tax legislation did not explain the concept of ‘company’, so for this purpose the law on 23 April 1964 Civil Code 1 (Further: (c) which under Article 551 points out that the company is an organized set of intangible and material assets intended for business. It shall include in particular:

• 1) an individual identification of the undertaking or its separate parts (name of the undertaking);
• 2) property ownership or movable property, including equipment, materials, goods and articles, and other property or movable property rights;
• 3) rights arising from the lease and lease of immovable property or movable property and the right to use immovable property or movable property resulting from other legal relations;
• 4) claims, securities rights and cash;
• 5) concessions, licences and permits;
• 6) patents and other industrial property rights;
• 7) property copyright and related rights;
• 8) business secrets;
• 9) books and documents relating to the conduct of business.

Under Article 55 1 k.c. the legislator defines the undertaking in a manner in question, by indicating the combination of the ingredients that form it. These components are organised for business purposes.

The calculation of the company's components is open and the legislator indicated those which belong to the major components of the undertaking in question 2 . It should therefore be stressed that the company may also include other material and intangible components.

According to Tomasz Król, the concept of a company applied to tax legislation “is a wealth whose change of ownership causes tax consequences other than the acquisition of a collection of unrelated assets. Not only the composition of this property is important, but also the moment of the change of ownership.

It shall not be treated as an undertaking of a component group which was not an undertaking of the previous owner. If, before the delivery, the group of components did not have the characteristics of the company and only acquired them from the new owner, we do not apply the tax rules dedicated to changing the owner of the company." 3 .

2. Sales

In order to effectively divest the company, it is necessary to maintain the appropriate legal form. The sale agreement of the company must be drawn up in writing with notarially certified signatures. If the company is part of a real estate, then such an agreement should take the form of a notarial act drawn up before the notary.

3. Organisation

However, the provisions of the Civil Code do not define the concept of an organised part of the enterprise (hereinafter: ZCP).

However, this definition is provided under Article 2(27e) Act on 11 March 2004 on tax on goods and services 4 (Next: the VAT Act) and Article 4a(4) Act on 15 February 1992 on corporate income tax 5 (Next: the Corporate Income Tax Act) and Article 5a(4) Act on 26 July 1991 on personal income tax 6 (Further: u.p.d.o.f.).

The above laws by an organised part of an undertaking shall mean an organisational and financial set of material and intangible assets, including liabilities, intended to carry out specific economic tasks, which could at the same time constitute an independent undertaking carrying out these tasks itself.

In terms of functional separation for the recognition of a given component group as an organised part of an undertaking, these components must remain interdependent in such a way that they should be treated as an organized autonomous set of functionally related components, and not a set of incidental elements whose only characteristic is that they are owned one entity 7 . This means that an organised part of the company is not the sum of the individual components with which a separate plant or company can be operated in the future, but a certain set of such components.

The basic requirement to establish that the transaction is a divestment of an organised part of the company is that it must establish a set of material and intangible components. In addition, it is necessary to separate this team from the existing company, which is to be separated into third planes:

• • organisational
• • financial,
• • functional.

All of this is intended to enable the buyer to continue without having to make substantial additions to the existing asset pool 8 . Therefore, the majority of disputes with tax authorities concern whether the exclusion of a certain asset at the time of, for example, the delivery of the goods does not result in the loss of the characteristics of an organised part of the undertaking. This could be, for example, an exclusion from the property supply.

4. Goods and Services Tax Act

According to Article 6(1) the VAT Act divestment transactions of an undertaking or an organised part of an undertaking are excluded from VAT. Therefore, the sale of an undertaking or an organised part of an undertaking is not subject to any tax on goods and services.

This means that there will be no need to pay the tax due and there will be no right to deduct input tax. However, it is important to note that the divestment of a company or an organised part of a company is distinguished from the divestment of individual elements of the enterprise.

If the divestment operation relates only to individual elements which do not have the capacity to operate independently as a separate company, that activity will be taxed on goods and services under the rules.

the VAT Act It is therefore important, on the basis of VAT, to prove that the disposal of a part of a company has autonomy as a separate company.

5. Civil Law Tax Act

According to Article 2(4) Act on 9 September 2000 on tax on civil law acts 9 (hereinafter: u.p.c.c.) are not subject to that tax to the extent that they are taxed on goods and services and if at least one party is exempt from the duty on goods and services for the purpose of carrying out this activity. Thus, if the activity is not subject to VAT, we will pay a tax on civil acts. As already indicated, the sale of the company or its organised part is completely excluded from the provisions of the Goods and Services Tax Act and is therefore subject to PCC. It should be stressed that, in the absence of specific arrangements for the divestment of the company or its organised part in the PCC, the individual elements of the company or its organised part will be taxed. As a result, a divestment of goods and property rights takes place within a divested undertaking or an organised part of it, and therefore the rate of tax according to Article 7 u.p.c.c. will be for:

• • real estate, movable property – 2%,
• • other property rights – 1%. PCC will be charged to the purchaser of the company or its organised part.
• 6. Income Tax Act (PIT, CIT)

As in the case of u.p.c., in the income tax laws, the legislature did not provide for specific rules on the sale of the company or an organised part of the enterprise. This activity should therefore be eligible as the sale of individual assets of the company. In Polish law we deal with two income taxes, i.e.

from natural persons who regulate u.p.d.o.f. and from legal persons who regulate the Corporate Income Tax Act It should be noted that the effects of selling the company or an organised part of the company under income tax must be considered separately for the seller and for the buyer.

However, the regulation of both of these laws on the disposal of components of the company is identical. On the basis of income tax, the divestment of the company or its organised part will result in the divestment of individual assets.

According to the general principles, the tax will be subject to income resulting from the reduction of the revenue generated by tax costs. On the buyer's side, it will be possible to further depreciate the assets of the company and to include them in the cost of obtaining income.

7. Summary

The article states that both income tax laws and u.p.c.c., the legislature did not specify specific provisions which would relate to the sale of the company or its organised part, and that this activity is therefore considered to be the sale of individual components of the company in the light of the above laws.

On the other hand, in terms of the VAT Act whether the sale concerns a company or an organized part of the company or individual components of the company (not forming ZCP) is already much more important. In the case of the sale of an undertaking or an organised part of an undertaking, the sale shall not be subject to VAT.

We will pay PPC and income tax (PIT, CIT – depending on the status of the seller). If the sales are related to individual components of the company, it will be necessary to tax it with a tax on goods and services.

Under income tax, sales of a company or an organised part of a company will be taxed as in the case of sales of individual components of the company.

_________________________________

1 Act of 23 April 1964 Civil code, i.e. Journal of Laws of 2020, item 1740.

2 M. Habdas [in:] Civil code. Comment. Volume I. General (Article 1-125), ed. M. Fras, Warsaw 2018, Article 55(1).

3 T. King, Company and organized part of the enterprise, ABC. https://sip.lex.pl/#/publication/469947771/krol-tomasz-przedsiebiorstwo-i-zorganizowana-czesc-przedsiebiorstwa?keyword=ZCP&cm=SREST (access: 9 December 2020).

4 Act of 11 March 2004 on tax on goods and services, i.e. Journal of Laws of 2020, item 106.

5 Act of 15 February 1992 corporate income tax, i.e. Journal of Laws of 2020, item 1406.

6 Act of 26 July 1991 on income tax on individuals, i.e. Journal of Laws of 2020, item 1426.

7 Letter from 6 July 2016 IRS in Katowice, reference no. IBPB-1-2/4510-436/16/BD, The determination of whether the separation of assets, through functional and financial separation qualified as a ‘real estate part’, is an organised part of the undertaking, http://sip.mf.gov.pl

8 Letter from 6 October 2020 Director of National Tax Information, reference no. 0113-KDIPT1-3.4012.567.2020.2.MK, VAT exemption for the disposal of an organised part of the enterprise, http://sip.mf.gov.pl

9 Act of 9 September 2000 the tax on civil law acts, i.e. Journal of Laws of 2020, item 815.

Bibliography

1. Act of 23 April 1964 Civil code, i.e. Journal of Laws of 2020, item 1740.
2. Habdas [in:] Civil code. Comment. Volume I. General (Article 1-125), ed. M. Fras, Warsaw 2018, Article 55(1).
3. King, Company and organized part of the enterprise, ABC. https://sip.lex.pl/#/publication/469947771/krol-tomasz-przedsiebiorstwo-i-zorganizowana-czesc-przedsiebiorstwa?keyword=ZCP&cm=SREST (access: 9 December 2020).
4. Act of 11 March 2004 on tax on goods and services, i.e. Journal of Laws of 2020, item 106.
5. Act of 15 February 1992 corporate income tax, i.e. Journal of Laws of 2020, item 1406.
6. Act of 26 July 1991 on income tax on individuals, i.e. Journal of Laws of 2020, item 1426.
7. Letter from 6 July 2016 IRS in Katowice, reference no. IBPB-1-2/4510-436/16/ BD, The determination of whether the separation of assets by functional and financial separation qualified as a ‘real estate part’ is an organised part of the undertaking, http://sip.mf.gov.pl
8. Act of 9 September 2000 the tax on civil law acts, i.e. Journal of Laws of 2020, item 815.