Part I: Acquisitions made through a share deal versus an asset deal.
While operating in an uncertain market, taxpayers need to be mindful of the economic conditions in which a deal is made. Multinationals should understand the current key tax issues and opportunities that come with every deal. With careful planning multinationals can maintain a tax advantage throughout the lifecycle of investments.
Therefore we are presenting in the following weeks answers to most important practical questions to tax aspects of M&A transactions in Poland.
Question 1: Which are the main differences among acquisitions made through a share deal versus an asset deal in your country?
Answer: From Buyer´s Perspective
The general result of concluding an asset deal is that the seller is obliged to recognise the gain on disposal and the purchase price paid by the buyer will constitute tax depreciation base as well as tax cost base (decreased by the depreciation write-offs made by the buyer) for the future sale of assets.
The acquirer of assets may be held responsible for tax liabilities of the seller in case the assets constitute enterprise or its organised part. The liability may be effectively limited or excluded if the buyer obtains from tax authorities a specific certificate disclosing tax liabilities and pending penalties due by the seller. In such a case, the buyer may not be held responsible for tax arrears and other dues not revealed by the certificate.
Until 2009 the buyer was also responsible for component assets connected with the economic activity carried on, if their unit value on the day of transfer was at least PLN15,000 (approximately €3,650). The liability was limited to the value of acquired assets. This responsibility was eliminated from 1 January 2009. However under transitional provisions introduced with the change, the above rule may be still applicable to liabilities of the seller prior to 2009 until expiry of limitation period (ie generally 5 years starting from the end of year when the payment was due).
Transactions regarding sale of business assets are generally subject to VAT (currently 23% standard rate). As long as the buyer runs VAT-able activity, VAT charged upon acquisition should be effectively neutral. Input VAT incurred upon acquisition may be utilised via deduction from output VAT or direct refund.
Certain transactions may fall outside the scope of VAT (enterprises or organised part of thereof; OPE), or be exempt from VAT (eg certain types of real estate). Sale transactions falling outside the scope of VAT and transactions regarding real estate and shares which are VAT exempt are subject to Polish Tax on Civil Law Transaction (TACL). The rates of TACL vary from 1% to 2% of the market value of assets (meaning usually purchase price).
Share deals do not allow the buyer to achieve step-up on the value of assets of the target company. At the same timeby acquiring shares in the target company, the buyer acquires an entity with all its potential tax liabilities, net operating loss (NOL) for a year of acquisition and unsettled losses from previous years. There is no legal possibility to cut off the liability of the target company for its tax liabilities arisen prior to acquisition.
Expenses incurred on acquisition of shares (eg price paid) constitute tax deductible costs on the date of disposal of the shares, while interest on the loan for purchase of shares are tax deductible costs on the date of incurring based on the current approach of tax authorities.
The acquisition of shares in a Polish company triggers obligation of payment of TACL. The tax at the rate of 1% is charged on the acquisition value of shares. Acquisition of shares in foreign company by Polish entity will also fall within TACL taxation if SPA is concluded in Poland.
Answer: From Seller´s Perspective
From the seller’s perspective both sale of assets and sale of shares are taxable events. Any income realised on the above transactions is subject to standard 19% CIT rate. In both cases, income realised on disposal may be off-set with operating losses of the seller (if there are any available) as Polish CIT does not provide for special regime for taxation of capital gains and gains from alienation of property.
In practice, if share deals are contemplated for the transfer of Polish target, the transaction is usually effected from the level of the seller located in the typical holding jurisdiction (where participation exemption regime exists). Combination of the use of DTT and provisions implementing EU Parent-Subsidiary Directive (90/435/EEC) and Merger Directive (90/434/EEC) is used to minimise tax burden on sale.
If you are interested how the issue is regulated in other countries please go to the Taxand Global Guide to M&A which covers 34 other countries worldwide.