According to the amended provisions of the Corporate Income Tax Act, the taxable revenue is the value, determined as at the date of the merger, of the acquiree's assets received by the acquirer or the newly formed company (s.12(1)(8c) of the Corporate Income Tax Act). However, the following is excluded from the taxable revenue:

• that value of the acquiree's assets received by the acquirer which corresponds to the issue price of the shares allotted to the shareholders in the merging companies (s.12(4)(3e) of the Corporate Income Tax Act);
• that value of the acquiree's assets which corresponds to the acquirer's percentage of the acquiree's share capital where this percentage is determined as at the last day preceding the date of the merger, if the assets are received by an acquirer holding at least 10% of the acquiree's share capital (s.12(4)(3f) of the Corporate Income Tax Act).

Furthermore, what is important for shareholders of the acquiree is that the taxable revenue in the case of a merger will not include the revenue earned by the shareholders in the acquiree or, as the case may be, the de-merged company, to the extent that such revenue is equal to the issue price of the shares allotted by the acquirer or the newly formed company (s.12(4)(12) of the Corporate Income Tax Act).

Note that the above exclusions will not apply if the merger was completed other than for "valid economic reasons".

According to the justification to the amendment to the Corporate Income Tax Act, the proposed changes to the tax provisions governing mergers were not intended to be revolutionary. On the contrary, the intention was to make the new provisions an equivalent of the previous rules. However, on closer inspection, no such conclusion can be drawn from either the wording of the new provisions or the individual tax rulings issued based on them.

The first major change is the rule that the amount of revenue for the acquirer must be determined first, and then this amount may be reduced by (1) the issue price of the shares in the acquirer allotted as part of the merger and (2) the amount being the product of the acquirer's percentage of shares in the share capital of the acquiree multiplied by the value of the acquiree's assets. Although the new provisions say nothing about the value based on which the acquiree's revenue should be calculated, the practice established in individual tax rulings is that the calculation should be based on the market value of the acquiree's assets.

A new term in the amended provisions is the issue price of a share. The Corporate Income Tax Act defines this term as the price for which a share is taken and which is specified in the company's statute or its articles of association or, if these documents are not available, in any other similar document, and which is not lower than the market value of the share (s.4a(16a) of the Corporate Income Tax Act).

The prevailing view in individual tax rulings is that the issue price of shares is the price "paid" to the acquirer for shares in the capital of the acquirer, i.e. the market value of the acquiree’s assets. However, according to some commentaries on the new provisions, the issue price should be defined as the price which the acquirer or the newly formed company pays to any shareholder in the acquiree for the acquiree's assets. On the practical side, this would mean that the issue price should be equal to the market value of the shares in the acquirer or the newly formed company in return for the acquiree's assets.

It seems that the 'issue price' concept was introduced in the Corporate Income Tax Act as a way to prevent non-taxable transfers of assets between shareholders in merging companies, i.e. to ensure that the share exchange ratio in a merger is based on the market value of the assets of the merging companies. However, given the doubts about the interpretation of the new provisions, it is not clear whether (a) the exclusion from revenue under s.12(4)(3e) of the Corporate Income Tax Act will apply if the share exchange ratio is based on market values or (b) it is also necessary for the value of the increase in the acquirer's share capital to be determined on the basis of market values. My opinion is that this approach would be unfounded, as the result would be that a merger accounted for using the pooling-of-interests method could be taxable (where the exclusion under s.12(4)(3f) of the Corporation Tax Act does not apply fully). 

Special attention should be given to what is known as downstream mergers, i.e. the acquisition of the parent company by a subsidiary. In such a case, the subsidiary buys back its shares from the parent company and then redeems the shares or issues them to a shareholder in the acquiree. As a result, such a merger may be completed with or without increasing the acquirer's share capital.

Individual tax rulings disagree on whether a downstream merger completed without an increase in the subsidiary's share capital, i.e. without new shares being issued, may be a tax neutral transaction. For example, in his interpretation of 15 November 2019 (reference: 0111-KDIB2-3.4010.275.2019.2.HK), the Director of the National Tax Information agrees with the applicant that the taking of shares, which is referred to in the definition of issue price, should be interpreted to mean not only the taking of newly issued shares as a result of a share capital increase, but also the situation where the acquirer issues any shares it has acquired as a result of the merger. This means that the exclusion under s.12(4)(3e) of the Corporate Income Tax Act may apply under such circumstances.

In another interpretation of 3 July 2019 (reference: 0114-KDIP2-2.4010.163.2019.1.AM), the Director of the National Tax Information states that the revenue exclusion under s.12(4)(3e) of the Corporation Tax Act applies where new shares are issued and allotted to the shareholders in the merging companies. This should not be equated with the allotment of existing shares. This interpretation means that a downstream merger is a taxable transaction.

As the new provisions are unclear, if the merger is more complicated or if there are changes in the valuation of the merging companies, it may be impossible to ensure the tax neutrality of the transaction. In such cases, it is fair to say that the Polish regulations are in conflict with the EU directive concerning mergers (Council Directive 2009/133/EC of 19 October 2009 on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States and to the transfer of the registered office of an SE or SCE between Member States).

To recap, today more than ever before, taxable persons should take care to verify whether a particular merger may enjoy the benefits of tax neutrality and, if they have any doubts, should apply for an individual tax ruling.

Małgorzata Gleń, Director in the Tax M&A Team at KPMG in Poland