Once Article 14a of the Polish Corporate Income Tax Act went into force, it was uncertain whether this provision applied to situations where a company under liquidation passes on its assets to a shareholder in non-monetary form. Administrative courts were not in agreement either. However, the latest rulings of Polish Supreme Administrative Court seem to settle this issue in favor of taxpayers. Therefore, a company under liquidation should not pay tax on assets transferred to its shareholder as part of the liquidation process.
By way of introduction
Article 14a of the Polish Corporate Income Tax Act entered into force on January 1, 2015. According to its wording, if the taxpayer settles in whole or in part a liability, including a liability under a loan (credit) incurred, dividend, redemption or disposal for redemption of shares, by providing a non-cash consideration, revenue of such a taxpayer is the amount of the liability settled as a result of such a consideration. However, if the market value of the non-cash consideration is higher than the amount of the liability settled with it, revenue should be defined as the market value of the non-cash consideration.
No clear courts’ position
Until now, Polish tax authorities and some administrative courts, including Supreme Administrative Court, held that along with the liquidation arises an obligation of a company towards its shareholder to transfer liquidation assets, if any. If such an obligation is performed by providing a non-cash consideration (e.g. by way of transfer of real property or movable asset), then a company under liquidation should recognize revenue in accordance with Article 14a of the Polish Corporate Income Tax Act. Such revenue, less tax deductible expenses, essentially should be subject tax at a rate of 19 percent.
At the same time, however, there were courts presenting a different position. According to them, the transfer of liquidation assets to a shareholder does not generate any revenue for a company under Article 14a of the Polish Corporate Income Tax Act. The transfer of liquidation assets by a company is a purely technical act that forms part of the liquidation process. By doing it a company does not settle any liability towards its shareholder. What is more, a company receives nothing in return. It is the last act preceding the end of existence of such a company.
Supreme Administrative Court’s rulings in favor of a taxpayer
In 2018 and 2019, Supreme Administrative Court had a change of heart when it comes generating revenue on the side of a company transferring liquidation assets to its shareholder in non-monetary form. In court’s opinion, the assumption that the transfer of liquidation assets generates taxable revenue for a company under liquidation would constitute the unlawful broadening interpretation of Article 14a. At the same time, the court stressed that the application of the said Article is allowed only if there is a legal relationship based on mutual performances as a result of which one party is obliged to pay the other a certain amount of money but at the end of the day settles this liability by providing a non-cash consideration. The transfer of liquidation assets, the court follows, does not result from such a legal relationship. It is just a technical act that forms part of the liquidation process. If it generated taxable revenue, a company would have to create additional cash reserves which would delay the liquidation.
More precision as a de lege ferenda postulate
The new rulings of Supreme Administrative Court may be the announcement of unification of case law which – from the point of view of legal certainty – is a desirable thing. Once again, however, the question must be asked why new tax regulations are subject to doubt and, worse, divergences in case law. At this point, nothing else remains but to appeal to the legislator to create more precise provisions that leave no room for tax authorities and courts to interpret them in an arbitrary or expanding way.
By Tomasz Piejak & Wojciech Jaranowski