The problem with applying capital gains tax exemption when selling shares by a Polish holding company comes down to one statutory requirement. This requires a detailed knowledge of all indirect shareholders of the holding company – up to two years prior to the sale of the subsidiary’s shares. The holding company has no control over this condition.
Formally, this excludes from the exemption any structures using stock exchange securities or investment funds. In practice, it makes the use of the exemption by holding companies with foreign shareholders extremely difficult or even impossible to implement. We believe that with public companies the obligation to verify the location of minority shareholders in tax havens should be omitted – as a condition that is impossible to fulfill.
Similar exemptions are common in Europe, including Central and Eastern European countries. Where they have been introduced, the conditions for applying the exemption are solely dependent on the situation of the dominant company and its relationship with the company whose shares are being sold.
Incentives for investors should be characterized by simplicity and predictability of use. By building a real investment offer, we can refer to the example of numerous countries in our region, e.g. Lithuania, Romania, Czech Republic, or Hungary, which allow the use of the exemption when selling shares, if they have been owned by the company for a specified period (a year or two).
Without clear and easy-to-meet conditions for applying preferences, transforming Poland into an investment paradise can be a challenging task. The use of the tax exemption by a holding company when selling shares of a subsidiary requires meeting a number of conditions, over which the taxpayer does not always have control.
The PwC Poland report “Polish Holding Company – Business Needs Change” states the possibility of verifying that the holding company has had no shareholders in tax havens for the past two years is very limited, and in the case of public companies or funds investments, it does not exist.
Capital gains tax exemption is common in “Old Europe” countries. In the Netherlands, for example, it applies to the sale of shares in a company in which one holds at least 5% of the shares (additional conditions include active investment management). In Luxembourg and Switzerland, the exemption applies to the sale of shares in a company in which at least 10% of shares have been held for a period of a year. An effective exemption of up to 95% of capital gains from the sale of shares is available in Germany.
In Poland, the application of the exemption by a holding company requires verifying the indirect shareholders of the holding company, and confirming that they neither have a registered office nor a management board in a country practicing harmful tax competition. This makes the use of capital gains exemption during the sale of shares by the Polish holding company almost impossible. Meanwhile, in Europe, including all our neighbors in the Central European region, there are many examples that regulate the provisions regarding holding companies in a simple and transparent way.
Central and Eastern European countries also apply capital gains exemptions as part of their investor incentive package. In both the Czech Republic and Lithuania, the minimum capital share is 10%, but the period of holding the shares is respectively 12 and 24 months. In Estonia and Latvia, capital gains are subject to the Estonian income tax – they are not taxed until the distribution to the shareholder. In Romania, the minimum capital share is 10%, the holding period is 12 months and the subsidiary must be headquartered in an EU/EEA country with which Romania has a double taxation avoidance agreement. Hungary does not have regulations regarding minimum capital share, and the holding period is 12 months, although exemptions do not apply to profits from the sale of shares in foreign controlled companies.
As it is known, “Old Europe” countries, like the countries of Central and Eastern Europe, use capital gains exemption as an incentive for investors. The exempt rules are designed to support the creation of a stable and attractive investment market and thereby stimulate the local economy. Poland could benefit from applying the solutions already implemented and tested abroad.
