On August 9, 2017, the Director of the National Tax Information issued an individual interpretation (case no: 0114-KDIP2-3.4010.166.2017.1.PS) regarding the CIT treatment of the remuneration received by a taxpayer (shareholder) with respect to a reduction in the taxpayer’s capital investment in a subsidiary.
The taxpayer’s certified question to the tax authority requested guidance on the treatment of the remuneration received from reducing ones equity in a subsidiary under two different circumstances:
1) through a reduction in the nominal value of shares and
2) through a voluntary redemption.
With respect to remuneration received from the reduction in the nominal value of shares, the taxpayer presented the issue of whether such remuneration would be CIT exempt. The Director of the National Tax Information, agreed with the analysis presented by the taxpayer, who suggested that first, it must be determined whether such remuneration constitutes income from the participation in profits of legal persons. The main criterion in determining whether income may be recognized by a taxpayer as resulting from the participation in profits of legal persons is whether it is actually achieved in relation to the taxpayer’s ownership of stocks or shares in another legal entity. Thus, although reducing one’s share capital in a subsidiary by decreasing the nominal value of shares in said subsidiary is not explicitly mentioned in Art. 10 sec. 1 of the CIT Act, taking the following factors into consideration:
- An open directory of revenue (income) recognized as revenue (income) from the share of profits of legal persons,
- The relationship between the remuneration paid for the reduction of the nominal value of shares in the possession of shares, and
- The same economic effect both in the case of a reduction in the nominal value of shares and in the event of redemption of shares,
the remuneration received in connection with the reduction in the face value of the shares constitutes profit from the participation of legal persons referred to in Art. 10 sec. 1 of the CIT Act.
The second step, as agreed to by the Director of the National Tax Information, requires an assessment of whether the remuneration is exempt under Art. 22 sec. 4 and 4a of the CIT Act. Thus, as established above, the remuneration received in connection with the reduction of the face value of shares constitutes profit from the participation of legal persons. Such profit is exempt from income tax when the following conditions are satisfied:
- the company paying the remuneration is established in the territory of the Republic of Poland,
- the company receiving the remuneration is also subject to income tax in the Republic of Poland on all his income, irrespective of the place of their achievement,
- the company receiving the remuneration owns at least 10% of the shares in the subsidiary for a continuous period of more than two years and that
- The company receiving the remuneration does not benefit from an income tax exemption on all its income, regardless of the source of its income.
Thus, the remuneration paid in connection with reducing the face value of shares constitutes profit from the participation of legal persons under Art. 10 sec. 1 of the CIT Act, which, upon fulfillment of the conditions specified in Art. 22 sec. 4 and 4a of the CIT Act is exempt from income tax.
With respect to the remuneration received from a voluntary redemption, the taxpayer presented the issue whether such remuneration would be subject to certain provisions of the CIT Act, specifically those pertaining to transfer pricing and fair market price. In response, the Director of the National Tax Information agreed with the taxpayer’s position that such remuneration will not be subject to either the transfer pricing provisions of the CIT Act (Article 9a (1) (1) and 11 (1) and (4)) or the fair market price provisions of the CIT Act (Article 14 (1)). As explained, the transfer pricing provisions explicitly indicate that they apply in situations where, as a result of the relationship between the entities, the conditions under which they enter into an agreement differ from those under which independent/unrelated entities would enter into the same agreement. The very content of these provisions suggests that they cannot apply to a voluntary redemption, as a voluntary redemption can only be performed between related entities and thus, it is impossible to compare the transaction to one between independent/unrelated entities. Similarly, a voluntary redemption cannot be performed between unrelated entities. Thus, it is not possible to establish comparable market transactions that could be referred to when setting the level of remuneration for the CIT. Therefore, taking into account the above, in the case of voluntary redemptions, the received remuneration will not be subject to either the transfer pricing provisions of the CIT Act (Article 9a (1) (1) and 11 (1) and (4)) or the fair market price rules of the CIT Act (Article 14 (1).
Ultimately, the Director of the National Tax Information agreed with the taxpayer’s analysis and opinion under both circumstances. Specifically, the Director agreed that the remuneration received by the taxpayer (shareholder) from reducing their equity in a subsidiary should be considered profits from the participation of legal person under the CIT Act that were nonetheless CIT exempt when certain conditions are met. Furthermore, the Director agreed that the remuneration received by the taxpayer (shareholder) from a voluntary redemption could not be subject to either the transfer pricing provisions of the CIT Act nor the fair market value provision of the CIT Act.
