Tax structuring of transactions
When a decision is made to acquire a particular business, the transaction can be made in the form of a so-called “asset deal” or in the form of a so-called “share deal.” Asset deal is the acquisition of the assets of a business, it can be done by acquiring the entire enterprise, its organized part or individual assets, while share deal is the acquisition of only the shares of a given entity from its current shareholder(s).
Asset deal (enterprise / organized part of an enterprise) – tax consequences on the part of the seller
CIT / PIT tax
On the seller’s side, the income from the sale of an enterprise / organized part of an enterprise under an asset deal will be the market value of the assets disposed of. On the other hand, the tax-deductible cost of tangible and intangible assets will be: the sum of expenses for their acquisition or manufacture on their own, increased by expenses for their improvement and reduced by depreciation and amortization write-offs made (the so-called “tax value of tangible and intangible assets”). On the other hand, the value of other components included in the enterprise / organized part of the enterprise should be determined in the amount of the costs incurred for their acquisition or creation. They may constitute a tax expense, provided they have not previously been recognized as such.
At the same time, on the grounds of the VAT Act, Article 6 pt. 1 of the VAT Law stating that the provisions of the Law do not apply to: transactions of disposal of an enterprise or organized part of an enterprise. This means, in practice, that the sale of an OCP is not subject to VAT, as well as there is no need to document the sale of an OCP with a VAT invoice.
Asset deal (enterprise / organized part of enterprise) – tax consequences on the part of the purchaser
CIT / PIT tax
In connection with the acquisition of an enterprise / organized part of an enterprise, so-called “goodwill” may arise, which, in accordance with Article 16g(2) of the CIT Act, is the difference between the purchase price of the enterprise / organized part of an enterprise and the market value of the assets comprising the purchased enterprise / organized part of an enterprise. The described goodwill can be calculated taking into account the following methods:
- Value of a company = (acquisition price + value of acquired liabilities) – value of assets – in the situation of including in the acquisition price the value of acquired liabilities
- Value of a company = acquisition price – (value of assets – acquired liabilities) – in a situation where the acquisition price does not include the value of acquired liabilities.
If there is additional “goodwill”, the total initial value of the acquired tangible and intangible assets will be equal to the sum of their market value. Positive “goodwill” is shown in the balance sheet as an intangible asset and is subject to amortization on the indicated market value, but the period of amortization write-offs may not be shorter than 60 months.
If, on the other hand, there is no positive goodwill on the acquisition of an enterprise / organized part of an enterprise, then in accordance with Article 16g Section 10 para. 2 of the CIT Act, the total initial value of the acquired fixed assets and intangible assets will be the difference between the purchase price of the OCP and the value of the assets that are not fixed assets or intangible assets.
The acquisition of an enterprise / organized part of an enterprise has analogous consequences to the sale of individual property and property rights. Consequently, it will be necessary to separately tax each asset included in the acquired property. Thus, the burden of taxation will be on the buyer, and the tax rates will be respectively:
on the contract of sale of movable property included in the IPP – 2%,
on other property rights – 1%.
It should also be pointed out that the positive goodwill created as part of the acquisition of an enterprise / organized part of an enterprise, in accordance with the resolution of seven judges of the Supreme Administrative Court of February 21, 2022 (ref. III FPS 2/21), is not a property right referred to in Article 1(1)(1)(a) of the PCC Act, so it is not subject to this tax.
Asset deal (assets) – tax consequences
If the transaction takes the form of a sale of assets, the tax consequences will be analogous to the sale of a business or its organized part, with the difference that no so-called “positive goodwill” will arise.
The sale of assets that do not constitute an enterprise or its organized part will be subject to VAT at the rate appropriate to the particular asset (a reduced rate or tax exemption may also be applied).
If the transaction will be subject to VAT then it will not be subject to PCC tax. Analogous effects will occur in the case of application of VAT exemption, except in the case of contracts of sale and exchange involving real estate or a part thereof, or the right of perpetual usufruct, cooperative ownership right to premises, the right to a single-family house in a housing cooperative or the right to a parking space in a multi-bay garage or a share in these rights, or contracts for the sale of shares in commercial companies. In these specific cases, despite the application of the VAT exemption, it will be necessary for the buyer to pay PCC tax calculated on the market value of the subject of the sale in accordance with the rate under the law.
CIT / PIT tax
The selling party will be required to recognize income in the amount of the market value of the shares / stocks sold. At the same time, the value of the cost of obtaining this income will depend on the method of acquisition of these shares / stocks.
As a rule, the sale of shares / stocks is considered to be an activity performed outside the scope of business activity, which in turn results in the exclusion of this transaction from the scope of VAT taxation (even if the sale is made by an entity that is a VAT taxpayer).
The transaction of sale of shares / stocks, which are considered property rights under the PCC Act, will be subject to 1% PCC tax. The burden of taxation will be on the buyer.