Income tax on cash contributions?
Income tax on cash contributions?
The date of January 1, 2018, resulted for the corporate income tax payers in the necessity of getting used to many fundamental changes in the Corporate Income Tax Act (CIT Act), which, in a revised form - at least until the end of this year - will determine the method of settlements under this tax.
Apart from the changes planned and signaled by the Ministry of Finance, consistently from the day of the first publication of the draft amendment Act, there were also those which were initially not planned. This state of affairs should be regarded as particularly undesirable, not only in the context of the application of legal provisions by taxpayers, but also from the perspective of quality of law itself, which in certain areas imposes obligations on citizens and therefore should not be misleading.
One of the changes introduced by the Act Amending the Income Tax Act of October 27, 2017 was the modification within the scope of regulations pertaining to the issue of taxation of cash contributions to companies and cooperatives.
Doubts related to the literal content of art. 12 clause 1 point 7 of the CIT Act
According to the current wording of Article 12 clause 1 point 7 of the CIT Act, in the case of contributions to companies / cooperatives, the taxable revenue is the value of this contribution specified in the company memorandum, articles of association or in another document, not lower than the market value of the subject of the contribution (if the value determined by the taxpayer is lower than the market value of the subject of the contribution or this value has not been specified in the articles of association, the memorandum or another similar document, the revenue is the market value determined as of the day of transferring the ownership of non-cash contribution item). The change of the aforementioned provision was motivated by the legislator's decision to apply the so-called small anti-abusive taxation clause to contributions in kind of enterprises and organized parts of enterprises (OPE). Under the current legal status (since January 1, 2018), contributions in kind of are tax-neutral transactions only if they are made for justified economic reasons. While the legislator managed to achieve the intended objective in this respect, additional consequence of adding an economic justification clause to an in-kind contribution of an enterprise or OPE has occurred. It has namely become no clear whether the legislator also intended to make cash contributions to the company or cooperative a subject of taxation.
Irrespective of the circumstances that the admissibility of generating tax revenue by cash contributions is in itself incorrect, the literal content of the provision in fact allows such a conclusion. The provision after the amendment of October 27, 2017 does not differentiate the rules for taxing contributions depending on their subject. It does not also use the notion of an in-kind contribution, which in the commercial law nomenclature means only non-cash contributions.
Tax consequences of amending the regulations
Taking as correct the statement that the value of a cash contribution is a tax revenue subject to CIT, would have far-reaching implications. It should be noted that due to the lack of corresponding changes in the regulations regarding the principles of determining tax deductible costs, the revenue generated in connection with the cash contributions, differently than in the case of in-kind contributions, would not be subject to reduction by the tax deductible costs - costs in the form of expenses for the acquisition of shares (stocks) could be settled only at the time of their sale. Another consequence of the abovementioned interpretation of art. 12 clause 1 point 7 of the CIT Act, would also be a different classification of revenue generated in connection with the contribution to the company or cooperative, depending on its subject: in the case of contributions in kind, this income would be qualified as revenues from capital gains and in the case of cash contributions it would constitute the revenue from the so-called operating activity (non-capital revenues).
The Finance Ministry makes a correction
The amount and nature of discrepancies in the area of contribution taxation under the CIT Act, that would entail the recognition that cash contributions to companies and cooperatives are subject to CIT, allowed from the beginnings to raise suspicions that such far-reaching changes in art. 12 clause 1 point 7 of the CIT Act were not planned by the Ministry of Finance. The first emphatic signal confirming these assumptions was the draft Act (prepared prior to the moment in which amending Act came into force) amending the Act amending the CIT and PIT acts of October 27, 2017 (i.e. the draft of November 30, 2017) which aim was, inter alia, restoration of the state in which the provision on the taxation of contributions includes exclusively in-kind contributions. Finally, due to the fact that the draft Act changing the amending act has not been so far adopted by the Parliament, , the Minister of Finance was forced to dispel all doubts in the indicated scope, by addressing this issue in the general interpretation issued on March 2, 2018.
Taking into account the position of the Minister of Finance expressed in the indicated general interpretation, from the point of view of practice and application of law, the issue of cash contributions to companies and cooperatives not being subject to CIT taxation shall be considered definitively settled. The Minister of Finance confirmed that art. 12 clause 1 point 7 does not cover the cases of making cash contributions to companies or cooperatives. In the opinion of the Ministry of Finance, the amendments introduced by the amending Act of October 27, 2017 were aimed only at taxing possible income resulting in the transfer of ownership of a given asset component of the taxpayer. Moreover, as indicated by the Minister of Finance, justification of the draft of amending Act did not include a fragment indicating the ministry's intention to apply CIT to cash contributions.
Protection of the taxpayers' interest
However, the described situation shall be a subject to a slightly different assessment from the perspective of the principles of legal certainty and legislative correctness. It provides namely clear evidence that the amendment has not been prepared in a conscientious manner and with care for the interests of the taxpayers, who certainly should not be held responsible for deciding which changes in the act were planned and which "happened" accidentally. The quality of the tax law should be evaluated unambiguously negatively in the case when the legislative procedure concerns the act resulting in a factual, unjustified and unplanned differentiation of the legal status of CIT and PIT taxpayers (since symmetric changes in Personal Income Tax Act were not subject to changes).
Anna Tyniec, Senior Consultant in the Tax Advisory Department at KPMG in Poland, the office in Kraków
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