Landmark judgment on taxation of contributions in kind
Rafał Graczyk
by Rafał Graczyk
Background
In May 2024, the Court of Justice of the European Union (CJEU) issued a landmark judgment in case C-241/23: P. sp. z o.o. v Head of the Warsaw Regional Revenue Administration Office, which is expected to stir things up in Poland. But let’s start from the beginning.
In 2014, two entities contributed real estate to a publicly traded company in exchange for shares issued during a capital increase. The consideration for the in-kind contributions was calculated by reference to the issue price of the new shares rather than their nominal value, which was much lower.
In September 2015, the tax authorities decided to take a closer look at the transaction, suspecting that the declared amount of input value-added tax (VAT) was overstated since – at least to their minds – the transaction should have been taxed based on the nominal value of shares issued in exchange for the assets.
The issuer appealed, but the decision was upheld upon re-examination at second instance. Eventually, in 2018, the matter reached the Supreme Administrative Court, which stayed the proceedings and asked the CJEU to issue a preliminary ruling on a point of law.
Now, nearly a decade after the transaction, the matter has been settled.
Judgment
The CJEU agreed with the appellant’s view, and held that, under the Principal VAT Directive (2006/112/EC), if one company contributes real estate to another in exchange for shares, the taxable amount should be determined based on the actual consideration agreed and received, meaning, in other words, the issue price of those shares.
Meanwhile, in Poland
Before January 2014, Polish taxpayers generally believed that the taxable amount should be calculated based on the net market value of assets contributed in exchange for shares (i.e. based on their issue price). This was consistent with the literal wording of the Polish VAT Act. However, the tax authorities took the same piece of legislation to mean that the nominal value of shares should be used instead.
Various provincial administrative courts tackled the issue, reaching different conclusions before the controversial provision was eventually repealed and replaced with one that made no reference to market value. In March 2014, the Supreme Administrative Court ruled that the nominal value of shares should be used to determine the taxable amount for in-kind contributions, seemingly resolving the matter.
Impact
The CJEU judgment certainly undermines the position adopted by the Polish tax authorities, including their past decisions in similar cases. As a result, companies will now be able to settle VAT based on the issue price of shares transferred in exchange for in-kind contributions rather than by reference to their nominal value.
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New to the firm, Rafał specialises in tax issues in real estate, energy, and manufacturing.Contact Rafał.
