What tax aspects should be borne in mind during the transformation of a Polish company?

What tax aspects should be borne in mind during the transformation of a Polish company

It happens that due to business or tax issues, shareholders decide to change the form of business activities, most frequently through the transformation of the company into another type of company. However, it should be taken into account that the transformation, in addition to organisational and legal matters, may also have specific tax consequences.

Transformation of a tax-transparent company being a CIT payer

Profits generated by Polish tax-transparent companies (private partnership, general partnership and limited liability partnership) are taxed only once – on a regular basis at the shareholder level, and later payment is tax-neutral.

All share-holding companies and parts of partnerships (limited partnership, limited joint-stock partnership and some general partnerships) are CIT payers. Therefore, while transforming tax-transparent companies into other partnerships or share-holding companies, it should be taken into account that the company will become a CIT payer, and the payment of current profits to the shareholders in the future may be subject to taxation. More about the taxation of companies in Poland can be found in our article Taxation of Polish companies from A to Z.

Moreover, pursuant to the Polish tax authorities’ approach, not only the payment of profits generated after the transformation may be taxed – if a tax-transparent company has profits from previous years that are unpaid, such a payment made after the transformation will be taxed according to the same rules as the current dividend (at the rate of 19%). It would mean that profits actually generated by the tax-transparent company would be subject to double taxation.

Therefore, it is worth paying profits to the shareholders before the transformation of such a company, and if the company does not have enough funds – the shareholders may adopt a resolution on their allocation for payment before the transformation. As a result of the resolution adopted, the profit retained in the company is recorded as liabilities towards the shareholders, and therefore its subsequent payment cannot be treated as dividends, even if it is made by the transformed company. Such an approach is approved by the tax authorities in individual interpretations issued.

Transformation into a tax transparent company – attention that should be paid to undistributed profits

While planning the transformation of a company being a CIT payer into a tax-transparent company, attention should be paid to profits that have not been paid to the shareholders so far – they are already subject to taxation at the time of the transformation, regardless of their subsequent distribution.

The tax base is the sum of all profits that have been retained in the company, except for profits allocated to the increase in the share capital (the so-called undistributed profits). In practice, while determining the value of the undistributed profits, the value of the supplementary capital (except for the share premium), reserve capitals, profits from previous years and profit from the current year should be taken into account. Importantly, however, the subsequent payment of funds generated before the transformation will be tax-neutral (the taxation took place on the day of the transformation).

The taxpayers on account of undistributed profits are shareholders of the transformed company, however the obligation to collect and pay the tax to the tax office is borne by the company established as a result of the transformation, as a taxpayer.

Settlement of the loss from previous years

As a rule, the company may settle the loss from previous years during the subsequent five tax years on a one-off basis up to the amount of PLN 5 million, and the possible remaining amount not deducted until the end of this period, however no more than 50% of the loss within one year.

In the case of the transformation of a company being a CIT payer into another CIT payer (e.g.: the transformation of a joint-stock company into a limited liability company), the transformed company may take into account the loss of the transformed company according to the rules indicated above.

The situation is different in the case of the settlement of the loss of a company being a CIT payer if it is transformed into a tax-transparent company (e.g.: the transformation of a limited liability company into a general partnership). Such a transformation results in the change of the payer of the income tax from the company being a CIT payer to the shareholders. This loss is forfeited due to the fact that the company ceases to exist as a CIT payer and, after the transformation, the entity that would have the right to settle it does not exist. In view of the foregoing, while planning the transformation of a CIT payer into a company not being a CIT payer, earlier settlement of losses, i.e. before the transformation, should be considered.

It should be indicated that in the case of the transformation of a tax-transparent company into another transparent company or a company subject to the CIT, the losses of the transformed company were initially settled by its shareholders. Therefore, despite the change in the organisational and legal form, the shareholders will still be entitled to settle the loss within the business activities conducted. Nevertheless, it should be noted that in the case of the transformation of a tax-transparent company into a company being a CIT payer, the shareholder will have the possibility to settle the loss within the subsequent five years only on income generated from the following source: non-agricultural business activity, i.e. in connection with conducting business activity as a sole proprietor or holding shares in profits of another tax-transparent company.

Transformation of a company and the tax on civil law transactions

The transformation of a company may entail the necessity to pay the tax on civil law transactions. The transformation is considered to be a change in the articles of association, and therefore it requires the payment of tax in the amount of 0.5% (the exception is the transformation of a share-holding company into another share-holding company) (e.g.: the transformation of a limited liability company into a joint-stock company). It is worth pointing out that not only a limited liability company, joint-stock company or simple joint-stock company is deemed to be a share-holding company in the context of the tax on civil law transactions, but also a limited joint-stock partnership.

The transformation of a share-holding company or a partnership into another partnership (except for a limited joint-stock partnership) will be subject to the tax on civil law transactions only if it leads to an increase in the assets of the company established as a result of the transformation. However, the tax authorities are increasingly often considering that, when determining the value of contributions made to the transformed company, it is necessary to take into account all assets of the transformed company, consisting of the values originally contributed to this company (i.e. contributions) and assets that the company accumulated in the course of its operations – therefore, the obligation to pay the tax on civil law transactions may occur even in the case where no additional contributions are made to the company in the course of the transformation.

In the case of the transformation of a company into a share-holding company (including a limited joint-stock partnership), the basis for the tax on civil law transactions is the value of the share-holding company’s value of initial capital of the company formed as the result of transformation, less the part of the share capital that has already been subject to taxation. Therefore, in practice, the transformation into a share-holding company may be subject to the tax on civil law transactions if additional contributions are made to cover the increased share capital.

In the case of restructuring activities, it is necessary to pay attention to many issues. Contact our Specialists, make sure that the transformation into another company is the best solution for you and benefit from our experience throughout the whole process.