On 17 November 2020. WSA in Poznań issued a judgment (I SA/Po 454/20) annulling the interpretation of the Director of National Revenue Information.
In the described facts, the company (the applicant) and its shareholder applied for an individual interpretation of the provisions of tax law concerning corporate income tax. It was indicated that the applicant is a Polish tax resident for corporate income tax purposes. The shareholder of the company is a Polish tax resident for the purposes of corporate income tax. Between the five shareholders of the company there is kinship or affinity to the second degree. The President of the company’s Management Board is the spouse of one of the shareholders. The applicant has not appointed a Supervisory Board. The shareholders do not sit on the company’s Management Board. None of the shareholders has additional rights to the company other than those resulting from the fact of holding shares, which could influence its key decisions. Three of the five shareholders of the company have decided to leave the company, and two have decided to continue to participate. It was agreed that withdrawing from the company will take place in the form of voluntary redemption of all shares held in the share capital, on the basis of a resolution of the shareholders’ meeting, without remuneration.
In the opinion of the applicants, the planned redemption of the shareholder’s shares will not constitute a controlled transaction (the provisions of Chapter 1a of the PDOP Act will not be applicable). It was pointed out that in order for a controlled transaction to occur, it is necessary to meet two basic prerequisites (establishing or imposing conditions of actions as a result of the links and undertaking actions of economic nature). In the opinion of the petitioners, none of these prerequisites will be fulfilled (the shareholder and the company are not affiliated entities). Redemption does not constitute “actions of economic nature”, which constitutes a definition element of a controlled transaction.
The Director of the National Treasury Information, in an individual interpretation, considered the applicants’ position in the part concerning the lack of tax revenue on the part of the company as correct. In the remaining scope, the position of the petitioners was considered incorrect.
The applicant challenged the view that the applicant and the applicant who is not a party to the interpretation proceedings are related entities, claiming, among other things, that the current wording of the ITO Act does not give grounds to consider that the shareholder and the applicant are related entities. The fact of existence of certain relations between a shareholder being the applicant and other shareholders is not sufficient to state that there is a relation between him and the company.
The Provincial Administrative Court has annulled the contested individual interpretation in the part that considers the position of the applicant as incorrect.
He admitted that the applicant was right that the planned redemption of the shareholder’s shares, in the form of free acquisition of the shareholder’s shares by the company for the purpose of their redemption, would not constitute a controlled transaction. The applicant correctly argues that the shareholder and the company are not related entities. The company and the partner do not meet the condition of qualified, direct or indirect, capital and other links (defined in Article 11a, paragraph 2 of the PDOP Act). Links in accordance with the said article, occurring exclusively between shareholders do not affect the conditions of voluntary redemption of shares, and consequently, there are no grounds for assuming that in the presented circumstances, voluntary redemption of shares without remuneration is an event whose conditions could be established as a result of links. Moreover, the links (within the meaning of art. 11a section 1 point 5 of the Act on ITOP) occurring exclusively between the shareholders have no influence on the conditions of voluntary redemption of shares, and as a consequence, there are no grounds for assuming that in the presented circumstances voluntary redemption of shares without remuneration constitutes an event the conditions of which could be established as a result of the links. The actual course of the transaction of voluntary redemption of a shareholder’s shares cannot therefore be identified on the basis of the actual behavior of the parties, since it must be based on the previous articles of association, and the provisions of the Code of Commercial Companies do not prohibit, but even allow for redemption without remuneration, if only the shareholder concerned consents to it.
The court, contrary to the applicant’s assertion, stated that free redemption of shares can be treated as economic activities. The key to the correct interpretation of art. 11a sec. 1 point 6 of the Act on ITOP is to determine the meaning of the term “action of economic nature”. The correctness of the above, broad understanding of economic activities is confirmed by the justification of the bill on the amendment of the Personal Income Tax Act (print no. 2860, Sejm of the 8th term, accessed at: sejm.gov.pl/sejm8.nsf/druk.xsp?no=2860). This justification indicates that the concept of a controlled transaction includes all economic activities (including commercial, capital, financial and service activities) whose actual content is identified on the basis of the parties’ actual behaviour.
Author: Magdalena Świątkiewicz – Tax Consultant