Tax credit for acquisition of other entities

Starting from 2022, taxpayers will be able to benefit from a new tax credit known as the consolidation tax credit or the acquisition tax credit. In a nutshell, it involves the possibility of deducting expenses incurred in connection with acquisition of company shares from the tax base. However, taking advantage of this modest tax credit (up to PLN 250,000) is subject to numerous conditions and restrictions.

The first doubt is already risen by the definition of the entity that can apply the tax credit. It should be a taxpayer who is an entrepreneur deriving income other than income from capital gains. It would seem that the provisions stipulated in this way exclude entities which derive income from capital gains from the group of taxpayers who may take advantage of the tax credit; this would unnaturally exclude entities earning  income at least from already acquired shares of other companies from the tax credit. Thus, the above-mentioned related restriction should be understood differently. The legislator allows the tax credit to be applied insofar as the taxpayer, in addition to income from capital gains, also derives income other than income from capital gains. In my opinion, this is also confirmed by the further part of the provision, according to which the deduction is made from the income derived by the taxpayer from income other than income from capital gains in the tax year.

If we already know who is entitled to apply the tax credit, it is time to determine which events are covered by the consolidation tax credit. The provision indicates directly that expenses for the acquisition of shares in a company with legal personality are deductible if:

1. the company whose shares are acquired has its registered office or management board in Poland, or in a country with which Poland has concluded a double taxation treaty containing a legal basis for the tax authority to obtain tax information from the tax authority of that other country;
2. the main object of the business activity of the company whose shares are acquired is the same as the object of the business activity of the taxpayer, or the business activity of such a company may reasonably be considered to be an activity supporting the taxpayer’s business activity, while the business activity of such a company is not a financial activity;
3. the above business activities had been carried on by the company and by the taxpayer prior to the date on which the taxpayer acquired shares in it for a period of not less than 24 months;
4. over the period of two years prior to the date of acquisition of shares the company and the taxpayer were not related parties;
5. the taxpayer, in a single transaction, acquires shares in the target company in an amount constituting an absolute majority of the voting rights.

In principle, the above conditions do not raise doubts except for the second one. It is not fully comprehensible the acquisition of shares in a company engaged in financial activities is excluded from the tax credit. Has the legislator completely excluded the possibility of acquiring an entity engaged in financial activities, or does it only apply to situations where the financial activities would be ancillary to the entity acquiring the shares. In the case of a very restrictive interpretation, it can be concluded that Polish entities conducting financial activities and acquiring shares in entities conducting identical business activities are excluded from applying the tax credit.

It is also worth noting that all acquisitions made within capital groups remain automatically excluded from tax credit. The tax credit also excludes special-purpose vehicles, established specifically to acquire shares in the target entity – this is due to the fact that taking advantage of the tax credit is conditional on carrying out a specific business activity for a period of no less than 24 months prior to the date of acquisition of shares.

The legislator has also defined the expenses directly related to the acquisition of shares in the company. These include expenses incurred for legal services related to the acquisition of shares and their valuation, notarial, court and stamp fees, taxes and other public and legal levies paid in the Republic of Poland and abroad.

Absurdly enough, due to the construction of the provisions, the amounts of expenses involved in the acquisition of shares are deductible, but expenses in the form of the price paid for the acquired shares and debt financing costs incurred in connection with this transaction are excluded from the tax credit.

In other words, the tax credit providing for the deduction of expenses directly related to the acquisition of shares from income applies only and exclusively to expenses related to the transaction. The most important expense, i.e. the price for the acquisition of the shares and the costs of its financing, cannot benefit tax credit.

It is also worth noting that the acquired shares must be held by the taxpayer for at least 36 months from the date of acquisition. Otherwise, in the tax year in which the shares are disposed of (or redeemed), the tax base is increased by the value of the tax credit previously applied. The value of the tax credit will also be repaid if the taxpayer (or its legal successor) previously applying the tax credit goes into liquidation, is declared bankrupt or in case the taxpayer’s or legal successor’s business is terminated under any other circumstances.

At this point, another doubt arises. Since the repayment of the tax credit takes place as a result of the termination of the taxpayer’s business activity, and at the same time the legislator refers to the situation in which a legal successor appears on behalf of the taxpayer, will the merger of the taxpayer with another entity result in the necessity of repayment of the tax credit received? On the one hand, the business activity of the taxpayer who applied the tax credit is terminated, on the other hand, all the taxpayer’s rights and obligations are taken over by a legal successor. These provisions are in conflict with each other, hence the need for further clarification by the legislator or a change in their wording.

Another doubt arises in the case of disposal of only a part of the acquired shares. Will any single disposal, even when only one share is disposed of (while maintaining absolute majority), result in the repayment of the tax credit? Or will the taxpayer, as long as it holds an absolute majority, be able to freely trade the surplus without having to repay the tax credit?

This brings us to perhaps the most controversial provision of the tax credit, i.e. the maximum amount of deduction of expenses from the tax base. This is in fact PLN 250,000. This amount may certainly impress taxpayers, entrepreneurs who have never been party to a share acquisition transaction. Nonetheless, entities professionally investing in shares see the amount of PLN 250,000 for transaction-related costs as only a drop in the ocean of the needs. In particular, when you consider that in order to take advantage of the tax credit, more than 50% of the shares in the Company must be acquired. Thus, it seems that the tax credit is not aimed at entities actively investing in Polish or foreign companies. Rather, it is an incentive for ‘new clients’ who have never entered this branch of business before and in this case this tax credit may help them to make a decision should they feel hesitant. But is it really so? It seems highly doubtful as the regulations are so complicated and subject to so many restrictions that the amount of the tax credit starts to become unattractive. Hence, yet again as with most of the Polish Deal regulations, it will mainly benefit the larger entrepreneurs for whom the 250,000 as the tax credit is not very impressive and they are able to accept the risk of its possible loss. For smaller taxpayers, the fact that the tax credit indeed exists is more likely to go unnoticed.