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Case of “Exchange of Shares” Income Tax Exemption Applicable also for Individual Shareholders


Under the Polish CIT regulations which implement EU Merger Directives into the Polish law, when a taxpayer transfers shares of a company to the EU company in exchange for issuance of shares of the latter, the value of shares received (both for the transferring an acquiring entity) should not be treated as a taxable revenue.


This is under the condition that as a result of this transfer:

1) either the acquiring company obtains the absolute majority of voting rights in the acquired company
2) the acquiring company, if already possessing the absolute majority of voting rights in the acquired company, would increase its stake.


This is a so called "exchange of shares" mechanism, most commonly applicable to the operation of the qualified contribution in-kind of shares. Taxand Poland considers the impacts.


As there are no similar regulations in the Polish PIT Law, this tax exemption appears to apply only to corporate entities. Thus, in practice, if shares are contributed by an individual as a shareholder, general rules regarding revenue calculation apply.


However, it is important to note a recent ruling issued by the District Administrative Court in Warsaw in relation to this. The Court ruled that since the wording of the Directive refers to "a shareholder", there is no legal ground to claim that it refers only to corporate shareholders and that it may not be applied in the case of individuals. In the Court's opinion, the crucial issue is that the Merger Directive does not distinguish between revenues received by corporations and individuals. The Court concluded that the Merger Directive had not been properly implemented into the Polish tax laws.


It then emphasised that after Poland's accession to the EU, the Community's law should prevail over the domestic regulations. In this respect, where a given Directive`s provision was not implemented properly (or was not implemented at all), it may be directly relied on by taxpayers. This is, however, only on the basis that the given Directive`s provision is unconditional and precise enough, as indicated in a number of the ECJ rulings.


The Court found that in the given case, all these conditions were met. Consequently, the discussed Merger Directive's provision should have direct effect for the benefit of all shareholders who derive revenues from exchange of shares of EU companies. Finally, the Court held that the lack of such express regulations in the Polish PIT Law was not relevant.

Taxand's Take

The Court's verdict may have fundamental impact for the following reasons:


Firstly, against the wording of Polish domestic law, the Court confirmed that no taxable revenue arises for the individual shareholder on the "exchange of shares". Taxpayers may rely directly on the Merger Directive in this respect. This finding, if upheld in other rulings, is of the utmost importance for the tax planning schemes involving individuals. This conclusion may also have significant impact in terms of the potential application for tax overpayment refunds.


Moreover, it should be noted that making direct reference to the EU Law due to its incorrect implementation (or lack of it) into the Polish law is not an extensively common practice among Polish courts and tax authorities. This is unusual and very proactive of Polish Courts to comment on the incorrect implementation of EU law into their domestic legislation. Taking this into account, rulings such as this one may constitute a turning point in EU Law perception (which is desirable given the current approach of the tax authorities).


Your Taxand contact for further queries is:
Hanna Filipczyk
T. +48 22 324 59 40

Taxand's Take Author