In principle, changes to company agreements and those that cause an increase in the company’s share capital are subject to tax under the Civil Law Transactions Tax (PCC). However, some actions can escape this taxation if certain conditions are met.
Changes in company agreements and its recapitalization
A limited liability company offering health services wanted to use the tax exemption. The company’s board decided to ask its shareholder, who owns 100% of the shares, to increase the company’s share capital by creating and subscribing for new shares in exchange for a specified cash contribution. With the acquired capital, the company planned to modernize the building in which it provides its services and purchase specialized medical equipment. The goal was to secure the company’s statutory activity and ultimately, to maximize its revenue.
An increase in capital was associated with actions allowing for tax exemption
According to the entrepreneur, because the increase of the company’s capital is related to health protection, the company can take advantage of the tax exemption based on Article 2 Paragraph 1 Letter f of the PCC Act. As per the provision, civil law transactions related to matters of education, extracurricular education, and health are not subject to PCC. The company cited a ruling by the Supreme Administrative Court from June 22, 2017, where it stated that every civil-law activity which was taken up in the matters mentioned in Article 2 Paragraph 1 Letter f are exempted from tax if they are related to activities specified in this provision. The Court emphasized that to maintain the right to exclusion from PCC taxation, direct realization of the purpose from these areas is not required. The entrepreneur concluded that the purchase of new equipment and the modernization of the building, made possible through the recapitalization of the company, will improve the quality of the medical services he provides therefore directly connected with the improvement of health protection.
The Authority did not see a direct connection
On August 25, 2023, the Director of the National Tax Information stated in a published individual interpretation in the official Customs and Tax Information System that an exception from the taxation of legal activities in the form of changes to the company agreement, also by raising its capital, the institution of exemption from taxation based on Article 2 Paragraph 1 Letter f of the PCC Act should be interpreted strictly and in accordance with literal wording. In the authority’s opinion, the change of the company agreement described by the entrepreneur is not an activity related to health. Although it is related to actions concerning health, the connection is not direct. (Interpretation from January 18, 2021, sign. 0111-KDIB2-2.4014.246.2020.1.MM).
The company can fight for its rights in court
The tax authority showed its pro-fiscal understanding of tax law regulations, skipping the interest of the entrepreneur who runs a business. The Supreme Administrative Court on June 16, 2021, stated that since the aim of the recapitalization is the modernization of buildings used for medical activity, such an action is covered by the exemption provided in Article 2 Paragraph 1 Letter f. This provision doesn’t specify the connection of the undertaken action with matters of science or health, and especially doesn’t qualify it in terms of directness or indirectness. It also doesn’t make the possibility of covering the legal action with exemption from PCC dependent on it. The Court emphasized that, according to the principle lege non distinguente nec rostrum est distinguente, it is not allowed to make distinctions in the interpretation of the law where they were not introduced by the legislator. The distinguishing of the direct and indirect connection of a civil law action with the purpose exempting from taxation has no legal justification.
Based on the above ruling, which solidifies a well-established line of court rulings, the company can fight to protect its interests and assets from the effects of the unfavorable decision of the authority. Of course, the final result of this case will be at the discretion of the court’s ruling panel.
The author, Robert Nogacki, is a legal advisor, managing partner, and Skarbiec Legal Office, specializing in legal, tax, and strategic advice for entrepreneurs.
