Taxation of share (stock) transactions
- M&A in Poland
- Merger control in Poland
- Due Diligence
- Taxation of share (stock) transactions
- Share Purchase in Poland
- Share Sale in Poland
Shares transfer related taxes in Poland
Tax Law has vital influence over structure of M&A deals in Poland. Even the simplest transaction of shares sales (in LLC or JCS) may tigger several taxes to be paid in Poland.
Typically, a execution of share purchase agreement gives rise to an obligation to submit a tax return and pay two basic types of tax:
- transaction tax (tax on civil-law transactions) and
- income tax (capital gain tax).
Although this obligation does not affect the validity of the share purchase agreement and the effectiveness of the transfer of the title to shares, a failure to comply may lead to tax implications, in some cases, even ones resulting from criminal tax law.
Transaction Tax for share purchase in Poland
Transaction Tax (Tax on civil-law transactions) is charged, among others, on the sale of proprietary interests, including the sale of shares in Polish companies.
Who pay the transaction tax?
It is the buyer of the shares that is obliged to pay the transaction tax in Poland.
When the tax obligation arises?
The tax obligation arises upon the execution of the share purchase agreement.
What about transaction in stages?
M&A transaction are often executed in several stages and the shares are not transferred right away. If the first stage of the transaction process is the execution of a preliminary agreement, whereunder the parties bind themselves to enter into a final sale agreement on a specific time in the future, the tax liability is created upon the execution of the final agreement which transfers the title to shares.
What is the transaction tax rate on share transfer?
The tax rate is equal to 1% of the value of the shares sold.
How to calculate 1 % of transaction tax?
It is important to make sure that the price stated in the share purchase agreement reflects the current market value of the shares. The market value is determined on the basis of average prices in transactions related to proprietary interests of the same type as of the date of the execution of the acquisition, without deducting debts and burdens.
What if the share purchase price is not market value?
If Polish tax authority finds that the price of the shares stated in the acquisition agreement does not reflect the market value, the authority will request the taxpayer to increase (or decrease) the price within a deadline of at least 14 days from receiving the request. The tax authority will also indicate the proper value resulting from its own preliminary valuation.
If the taxpayer fails to comply with the request and states a value that is higher or lower than the market price, Polish tax office will reassess the price based on an expert’s opinion or an appraisal submitted by the taxpayer.
Summing up, if the investor buys shares at an abnormally low price, Polish Law provides that the competent tax office will be authorized to open a tax procedure to determine the market value of the shares and issue a decision on the payment of supplementary tax.
Transaction Tax reporting obligation
Polish Tax Law states that the buyer of shares has a duty to file a tax return related to the tax on civil-law transactions using a specific form and calculate and pay the tax within 14 days from the day when the tax liability arose, i.e., the day when the share purchase agreement transferring the title to shares was executed.
Income tax (capital gain tax) from share sale in Poland
Merger or acquisition deals most usually generate income, which in Polish Tax Law would be defined as capital gain that is subject to income tax (capital gain tax) in Poland.
How the income (capital gain) is calculated for taxation purposes ?
Income from the sale of shares is equal to their value expressed as a price stated in the agreement minus the expenses. However, if the price differs materially from the market value without a justified reason, income may be determined by the Polish tax authority.
Market value of share transactions
The market value is determined on the basis of market prices in transactions related to rights of the same type, taking into account their condition, the degree of wear and the time and place of their disposal for a price.
If the price of the shares determined by the parties differs substantially from the market value, the tax authority will request them to adjust the value or explain the reasons for using a price substantially different from the market value.
In the event the parties fail to respond, adjust the value or explain the reasons for using a price substantially different from the market value, the Polish tax authority will determine the value on the basis of an opinion of one or more experts.
Capital gain tax rate in Poland
The capital gain tax in Poland (income tax) rate is equal to 19% of the income. The rate is applicable for both corporations (CIT) and individuals (PIT).
Capital gain tax for selling shares in Polish company by non-residents
Tax obligation for sale of shares in Polish companies depends on the possession of Polish tax residence. In accordance with Polish Tax Law non-residents are not subject to so called “unlimited tax liability in Poland” but may be subject to so called “limited tax liability in Poland”, which means that they are liable to pay taxes for Polish revenues that are explicitly listed in Personal Income Tax and Corporate Income Tax Act. This includes:
- “the transfer of ownership of shares (shares) in the company … – if at least 50% of the value of the assets of such a company are real estate located in the territory of the Republic of Poland or rights to such real estate ”.
In consequence, non-resident selling shares in company will be obliged to pay tax in Poland on condition that at least 50% the value of the assets of such a company are, directly or indirectly, Polish real estate.
Above mentioned provision of Polish Tax Law may vital significance for M&A transactions that involve taking control over companies owning real estate in Poland.
Nevertheless, it should be emphasized that the provisions of Polish tax law relating to non-residents should be applied taking into account agreements on the avoidance of double taxation (Double Taxation Treaties). Thus, in the case where a non-resident gains income from a source located in Poland, the agreements on the avoidance of double taxation shall examined.