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Supreme Administrative Court’s Resolution Concerning Costs Of Capital Increase In CIT
On 24 January 2011, the Polish Supreme Administrative Court (SAC) issued a resolution of 7 judges regarding the possibility to recognise expenses connected with increasing share capital as tax deductible costs in CIT of the company, which capital was increased. Taxand Poland examines the recent unfavourable administrative court verdict.
Previously, Polish tax authorities were consequently refusing right to deduct aforementioned expenses as tax costs, claiming that costs related to an increase of share capital are general expenses connected with the functioning of companies and cannot be linked to its income and consequently cannot be deducted. The administrative courts were deciding unequivocally in similar cases. On one hand the courts were issuing verdicts granting the right to deduct costs related to the increase of capital. However, on the other hand there were numerous verdicts accepting the negative position of tax authorities in this regard.
The basis for SAC's resolution was the company request to tax authorities for binding ruling. The company planned to increase its share capital by issuing shares in an initial public offer (IPO). The company claimed that the incurred expenses connected with the IPO and an increase of share capital should be deducted. These expenses consist of costs directly connected with IPO, as notary fees, court registration fees, tax on civil law transactions (TCLT) regarding increase of capital, and costs indirectly connected with IPO e.g. preparation costs, organisational and technical support costs, legal, auditory and advisory fees, etc. The SAC partly acknowledged the company's position regarding distinction between expenses directly and indirectly connected with the IPO / increase of share capital. However SAC decided that only expenses indirectly connected with increasing its initial capital should be identified as tax deductible costs. Expenses directly related to the issuance of new shares, are not deductible costs without which it is not possible to increase the company's share capital.
As a consequence, SAC ruled out the right to deduct necessary expenses which are to be incurred within the process of capital increase. Mostly, such exclusion relates to costs such as notary and court registration fees. Nevertheless, the rule indicated by the SAC in 7 judges resolution relates also to the TCLT cost incurred in connection with such increase, which may be of importance for the process of capital increase (TCLT amounts to 0,5% of the increase of capital). On the other hand SAC approved tax deductibility of other expenses related to the process such as legal and advisory services connected with increase of the capital and IPO. This part of the resolution should be deemed positive for the taxpayers, as questioning the tax authority's awareness and position in this regard.
The SAC's resolution is binding only in the case it was issued. It does not oblige other administrative courts to rule in a similar way in similar cases. However, in general the resolution of the 7 judges are issued in uncertain legal cases with divergent court verdicts, such resolutions may commonly set a precedent and become a legal principle for other administrative court chambers in similar cases. In practice other administrative courts rarely rule out on the contrary to such resolution.
The above may have a positive meaning, as the SAC approved the deductibility of certain additional costs related to the IPO and capital increase, such as legal and advisory services, which amount may be significant in terms of process. However the resolution changes the negative standpoint of tax authorities on the deductibility of TCLT related with the capital increase, which was commonly criticised by tax practitioners and experts.
The SAC's 7 judges verdict is not commonly in force on Polish legal system grounds and does not oblige other administrative courts to issue similar verdicts in similar cases. In practice however SAC's resolution may have a strong impact on further judgments. As the verdict approves and changes the negative tendencies of tax authorities in terms of CIT deductibility of TCLT incurred in connection to increase of share capital TCLT will become an additional tax burden for companies involved in the process of capital increase.
With the above, companies should be aware of such SAC's resolution. Additional actions or precautions should be analysed in terms of structuring the planned process to eventually avoid an additional tax burden.
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