Raise your capital, lower your tax, American Investor, April 2011
There are costeffective ways of raising share capital of your company
Increasing the share capital is a common method for shareholders of a limited-liability company to give the company a cash transfusion. Below are some tips on how to reduce the tax effects of a capital increase and reduce the costs of the operation.
First check the articles of association
As a rule, increasing the share capital of a limited-liability company requires an amendment to the articles of association in the form of a notary deed. However, the Polish Commercial Companies Code provides the option of increasing the share capital through an ordinary shareholders’ resolution in writing, without amending the articles of association. This means the company can skip a visit to the notary and reduce the costs of the increase accordingly. In order to take advantage of this option, it must be provided for in the articles of association, stating the maximum amount by which the capital may be increased without amending the articles as well as the deadline for such increases.
Consider how the contribution will be made
An increase in share capital is subject to the tax on civil-law transactions, at the rate of 0.5% of the amount of the increase.
The capital may be increased either by creating new shares or by increasing the par value of the existing shares, and the contribution to cover the increase may be made in cash or in kind. A common practice when there are outstanding shareholder loans to the company is to cover the capital increase through an in-kind contribution in the form of the shareholder’s claim for repayment of the loan—thus converting debt to equity.
Under the rule of single taxation of contributions to a company, an increase in share capital covered by an outstanding shareholder loan which was previously subject to the tax on civil-law transactions, or a tax on capital contributions in another E.U. member state, will be exempt from the Polish transaction tax. It is important to bear in mind that this exemption will not be available if the shareholders resolve to cover the increase in share capital in cash, and then the shareholder’s claim for repayment of an outstanding loan is set off against the company’s claim for payment of cash to cover the capital increase.
Think about an increase with agio
In a typical capital increase, shareholders take up shares at par value, i.e. the contribution (in cash or in kind) is equal to the par value of the shares taken up in the capital increase. Then the entire value of the contribution is subject to the tax on civil-law transactions, because that is the amount by which the share capital has been increased.
However, it is possible to follow a construction in which the shareholders make contributions that are worth considerably more than the par value of the shares they take up in exchange. The excess contribution, beyond the par value of the shares, which is also referred to by the term agio, is assigned to the company’s supplementary capital.
Because the agio does not increase the amount of the share capital, it is not subject to the transaction tax. There are no regulations specifying how great the agio may be in relation to the par value of the shares that are taken up. Thus the tax authorities will accept a capital increase even where the agio represents 99% of the contribution and the par value represents only 1% of the contribution for the shares. In that case, the transaction tax will be applied to only 1% of the contribution, and 99% of the contribution will be free from transaction tax as a contribution assigned to the supplementary capital.
A capital increase with agio will not be satisfactory, however, for companies that need to increase the share capital as such, rather than the supplementary capital. (An example of this situation would be where the company wants to raise the share capital to avoid thin capitalization problems.)
It should also be pointed out that contributions by shareholders in cash or kind to cover share capital, as well as agio in cash or kind assigned to the supplementary capital, do not constitute revenue of the company for purposes of the Corporate Income Tax Act.
Take deductions from the basis for transaction tax
As mentioned, the basis for the tax on civil-law transactions in the case of an increase in share capital is the amount by which the share capital is increased. However, before calculating the tax, this value should be reduced by (1) the notary fee (including VAT) for preparing the deed that includes the shareholder resolution on increase of the share capital, (2) the court fee for amending the company’s commercial register entry in the National Court Register to reflect the new amount of the share capital (currently PLN 400), and (3) the fee for announcement of the entry in Monitor Sądowy i Gospodarczy (currently PLN 250).
CIT treatment of expenditures on capital increase
Previously the tax authorities had taken the view that any and all expenditures incurred by a company in connection with an increase in share capital could not be deducted as revenue-earning costs of the company because they are related to the company’s non-taxable income (as mentioned above, contributions to cover share capital are not included in the company’s revenue for CIT purposes). This view used to be shared by the administrative courts as well.
However, in a resolution issued on 24 January 2001 (Case No. II FPS 6/10), the Supreme Administrative Court relaxed its previous position and held that only expenditures that are absolutely essential to the capital increase cannot be deducted as revenue-earning costs. (The case involved CIT treatment of expenses connected with an issue of new shares in a joint-stock company, but the court’s holding should apply by analogy to a capital increase in a limited-liability company as well.) Other expenses that are only indirectly related to the increase in share capital may thus qualify as deductible revenue-earning costs.
In light of this resolution by the Supreme Administrative Court, it should be recognized that the expenditures on a capital increase that are excluded from deduction as revenue-earning costs include the court fee, the publication fee, and (if applicable) the notary fee and transaction tax, because the capital may not be increased without incurring those costs. However, indirect costs such as fees for lawyers, auditors and other advisors, and costs of preparing analyses, opinions, valuations or translations related to the capital increase, will be deductible as revenue-earning costs.
The tax authorities take an even more liberal approach to deduction of input VAT on invoices documenting expenditures connected with an increase in share capital. Even though an increase in share capital is not an operation that is subject to VAT, the tax authorities take the view that the taxpayer has the right to deduct the full amount of input VAT on expenditures for services related to a capital increase, so long as the taxpayer itself conducts business that is subject to VAT. It is irrelevant in this respect whether or not such expenditures also qualify as deductible revenue-earning costs for CIT purposes.
Published in: American Investor, April 2011