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TRANSFORMATION OF COMPANY LIMITED BY SHARES – – TAXATION OF RESERVE AND SUPPLEMENTARY CAPITAL

One of the significant issues faced by companies
limited by shares planning to become re-established
as partnerships (for instant as the recently more and
more popular limited joint-stock partnership (spółka
komandytowo-akcyjna)) is the issue of taxation of
the accumulated equity capital funds. In particular,
case-law offers differing views as to whether in case
of such transformation the funds of the
supplementary or reserve capital are at all taxable. In
the light of the above, the judgement of the Regional
Administrative Court in Rzeszów of 6 November
2012 (case file I SA/Rz 892/12), which corresponds
with the judicial approach that favours the taxpayer
and has recently dominated the case-law, is worth
noting (see also case file II CSK 522/08, II FSK
1935/10).

The facts surrounding the dispute in the case referred
to above were as follows. The shareholders of a
limited liability company desired to re-establish it as
a partnership. In the previous years the company had
generated a profit that had always distributed in
accordance with the Commercial Companies Code
(“CCC”). Most frequently the meeting of
shareholders would resolve to distribute the profit
among the shareholders as dividend or to transfer it
to the supplementary or some other capital fund.
Given the proposed transformation, a question arose
whether or not tax would apply to the moneys
accumulated as capital funds.

Pursuant to Article 24(5)(8) of the Act on Personal
Income Tax (Journal of Laws of 2012, item 749):
“Income (revenues) from a share in the profits of
legal persons shall be the income (revenues) actually derived from such share, including the value of
undistributed profits in companies limited by shares
in the event of re-establishment thereof as
partnerships; the income shall be determined as at
the re-establishment date” (similarly, Article
10(1)(8) of the Act on Corporate Income Tax). In its
judgement referred to above, the Regional
Administrative Court in Rzeszów held that the
expression “undistributed profits” (niepodzielone
zyski) has no legal definition in any of the tax acts.
Consequently, the Commercial Companies Code
laying down the procedure for distribution of profits
generated by companies limited by shares and
specifying which amounts may be distributed is the
legal act to which reference must be made in an
attempt to define the above term (Article 192 of
CCC).

Pursuant to Article 192 of CCC the amount
distributable among the shareholders must not
exceed the aggregate of: profit for the last financial
year, undistributed profits of previous years, and any
distributable amounts drawn from the supplementary
and reserve capital funds set aside from the
company’s profit. The distinction between
undistributed profits of previous years and
supplementary/reserve capital is particularly
significant, as these are two separate balance sheet
items and thus cannot be regarded as equivalent. The
more so, the supplementary/reserve capital cannot be
considered to be part of undistributed profits. In its
discussion, the Court stressed that in the relevant
case, in order to ensure correct interpretation, it had
to rely on CCC regulations. The Court held that
while CCC did not include a legal definition of the
term “undistributed profits”, in the event the profit
had been distributed in accordance with the
company’s Articles of Association, e.g. by setting it
aside as supplementary or reserve capital, it could
not be regarded as undistributed profits. Moreover,
each and every distribution of the profit by the
Meeting of Shareholders of a limited liability
company, regardless of whether the distributable
moneys were retained within the company or
allocated among its shareholders, would cause the
moneys covered by the profit distribution resolution
not to be considered undistributed profits.

Summing up, the interpretation of the expression
“undistributed profits” provided by the Regional Administrative Court confirms the opinion presented
a number of times by courts that setting aside profits
as the company’s reserve or supplementary capital
does meet the definition of “profit distribution” and
by the same token the provisions of Article 24(5)(8)
of the Act on Personal Income Tax do not apply.
One can only hope that in the future this view, which
is now part of the settled case-law of administrative
courts, will be also adopted by tax authorities.

MILLER, CANFIELD,
W. BABICKI, A. CHEŁCHOWSKI I WSPÓLNICY SP.K.
ul. Batorego 28-32
81-366 Gdynia
Tel. +48 58 782-0050
Fax +48 58 782-0060
gdynia@pl.millercanfield.com
ul. Nowogrodzka 11
00-513 Warszawa
Tel. +48 22 447-4300
Fax +48 22 447-4301
warszawa@pl.millercanfield.com
ul. Św. Mikołaja 7
50-125 Wrocław
Tel. +48 71 337-6700
Fax +48 71 337-6701
wroclaw@pl.millercanfield.com

Disclaimer: This publication has been prepared for clients and professional associates of Miller Canfield. It is intended to provide only a summary of certain recent legal
developments of selected areas of law. For this reason the information contained in this publication should not form the basis of any decision as to a particular course of
action; nor should it be relied on as legal advice or regarded as a substitute for detailed advice in individual cases. The services of a competent professional adviser
should be obtained in each instance so that the applicability of the relevant legislation or other legal development to the particular facts can be verified.