“Poland is the largest market for M&A transactions in Central and Eastern Europe, although the time it takes to complete them in Poland has increased significantly over the past four years. Perhaps the situation will be improved by the amendment to the Commercial Companies Code (CCC), which came into force on 15 September 2023, specifically the introduction of the procedure of division of companies by spin-off. It may replace the cumbersome and time-consuming practice of contributing assets in kind to a newly established company. However, it is necessary to clarify the tax regulations in this respect,” says Krzysztof Libiszewski, Partner and expert in M&A transactions at Wolf Theiss law firm.
“Division by spin-off is a new procedure for transformations of business entities in the Polish legal order, which is introduced by the latest amendment to the CCC. To date, there have been transactions structured in such a way that an entity wishing to sell its business or an organised part thereof would first establish a new company, make a contribution-in-kind to it, and then sell its shares to an investor. The main disadvantage of this structure was its time-consuming and complicated nature,” explains Krzysztof Libiszewski.
The new regulations may significantly facilitate the M&A process by allowing a company to be spun off and then sell its shares to an interested buyer. This is all the more important as, according to industry reports, the average time needed to close a merger or acquisition transaction has recently increased significantly. The latest survey conducted by KPMG in Poland confirms this trend and indicates that from the date of the first contact between the parties until the signing of the transaction agreement (e.g. SPA), an average of 10 months elapses. This is a significant extension compared to the 2019 figures.
The introduction of a new type of demerger of commercial companies – demerger by spin-off – is a very significant change, as in the previous legal order all permissible procedures in this respect resulted in the allocation of shares to the existing shareholders of the demerged company. In practice, this meant that there was no instrument that would allow the company to transfer its assets or part thereof to another entity in exchange for the share rights of that entity using the principle of general succession, adds Maciej A. Szewczyk, Partner and expert in M&A transactions at Wolf Theiss law firm.
The amendments to the regulations on domestic reorganisations of companies and business entities meet the expectations of entrepreneurs and expand the range of options available to them. The source of the amendments was Directive 2019/1151, which expanded the catalogue of permissible cross-border transformations. As a result of its implementation, it was necessary to supplement the regulations also at the national level. As a result, Polish companies will be able to carry out the same reorganisation processes both between themselves and with entities from other EU member states.
However, the implementation of the regulations related to the introduction of demerger by spin-off may also have tax consequences, which the legislator seemed not to notice.
There is a belief among tax advisers that the amendments to the Companies Act should have been accompanied by adjustments to the tax laws that would have addressed the tax consequences of the reorganisation. In the absence of these, ambiguities arise, the consequences of which may lead to interpretation disputes between taxpayers and tax authorities, emphasises Karolina Stawowska, Partner and tax expert at Wolf Theiss law firm.
As the law firm’s experts show, a legislative postulate to the legislator would be to supplement Article 12(1)(8c) of the Corporate Income Tax Act in such a way as to provide for the issue of shares to the divided company itself. The aforementioned provision stipulates that the income for the company is the market value of the assets received from the company being divided, determined on the day preceding the day of division, in the part exceeding the value adopted for tax purposes of the components of such assets, not exceeding the market value of such components. Without this clarification, there is a justified risk of the application of Article 12(1)(8d) of the above-mentioned Act, which may result in the entire property received by the company to which the organised part of the enterprise is transferred being subject to 19% income tax. The principle of tax neutrality of a demerger by separation would therefore be preserved.
“The second issue relates to the fact that a demerger, for its tax neutrality, requires that both the business that will remain in the demerged company after the demerger and the business transferred to the other entity as a result of the demerger constitute organised parts of the business. It is precisely the aspect of the existence or not of an organised and independent character of the activity being spun off and remaining in the company being divided that is of interest to the tax authorities and the subject of numerous interpretative queries.
In the case of a tax-neutral contribution in kind, it is sufficient that the object of the spin-off is an organised part of the business. The assets that remain in the company making the contribution in kind no longer need to be of this nature. In practice, therefore, tax-neutral in-kind contributions may be an easier way of separating assets from a company and transferring them to a controlled entity than division by spin-off,” Karolina Stawowska concludes.
In recent years, Poland has ranked first in the CEE region in terms of both the number and value of M&A transactions. According to reports, between 340 and 350 M&A transactions were conducted on the Polish market in 2022. Their value was expected to reach nearly PLN 75 billion.
Author: Wolf Theiss
