Can the share sale price be lower than market value?
The provisions of Polish commercial law, corporate law and civil law do not impose specific requirements as to the amount of the price - other than that it should be a price freely agreed between the parties. However, certain requirements appear in the tax law regulations. Pursuant to Art. 6.1.1 of the Polish Transaction Tax Law (the "PCC Act"), in a share sale agreement, the taxable amount is the market value of the shares sold. If the price of the shares set forth in the share sale agreement differs significantly from the market value, the tax office may request the parties to the agreement to change that value and to indicate the reasons justifying the price that differs significantly from the market value.
When will the tax office determine the value of the shares being sold?
If the parties to the agreement fail to respond or fail to amend the value, or fail to provide reasons that justify a price that differs significantly from the market value, the tax office will determine the market value of the shares based on the opinion of an appointed expert. If the tax authority appoints an expert and the value of the shares determined taking into account the expert's opinion differs by more than 33% from the value provided by the taxpayer, the costs of the expert's opinion will be borne by the taxpayer. In addition, the tax authority will be able to determine the correct value of the tax base and, consequently, determine the tax liability by way of a tax decision.
Undervaluation of shares in M&A transactions
In merger and acquisition (M&A) transactions it is particularly important that the price calculation formula does not refer to factors which do are not related to the value of the shares. It happens that in commercial arrangements the parties to the transaction try to discount other values that do not have any relation to the shares in the share price. This practice can increase the risk that the value of the shares will be questioned by tax authorities. Such transactions should always be supported by a law firm specializing in M&A (mergers and acquisitions).
Is it a criminal offence to undervalue a share?
If a taxpayer does not respond to the summons of the tax authority or does not increase the value of the share in accordance with the expert's opinion, the tax authority may, on a reasonable suspicion of an offence, institute penal fiscal proceedings under Art. 56 of the Penal Fiscal Code (hereinafter referred to as "the KKS") which provides for criminal liability for submitting an incorrect tax return leading to a tax loss.
Who is liable for undervaluation of shares?
Tax fraud under Art. 56 of the Polish Criminal Tax Law is an individual offence - it can only be committed by persons who have the status of taxpayers. In light of Art. 4.1 of the PCC Act, the tax obligation under a sale agreement is borne by the buyer. Consequently, it is the buyer who will have to pay the tax on civil law transactions and it is the buyer who will bear the consequences of incorrectly determining the value of the sold shares. It should be remembered that since the seller of the shares is not a PCC taxpayer under the sale agreement, he cannot commit an act under Art. 56 of the Polish Code.
What is the penalty for understating the value of shares in a share transaction ?
The Fiscal Penal Law provides that the level of liability depends on the amount of loss, however, in each case the taxpayer is liable only on the basis of intentional guilt, so liability arises only if the taxpayer had an intention (direct or potential) to submit an incorrect tax declaration and lose tax. Taking into account that the market value of the share cannot be determined by every average taxpayer and that it is relatively hard to estimate, if criminal proceedings are initiated, the taxpayer may defend himself that he did not intend to evade tax, and any possible incorrect declaration of the share value resulted from negligence or recklessness, i.e. it was unintentional.
Share Value Understatement and Criminal Liability
To sum up, under Polish law, if a company's shares are undervalued when sold, there is a risk of criminal liability. If proceedings are initiated, in order to minimize the risk of incurring criminal liability, legal steps should be taken as soon as possible to effectively defend your interests and secure your business. You may need the support of lawyers specializing in penal fiscal law