Tax consequences in Poland of converting receivables into share capital

Provisions referring to share capital in the context of transfer pricing or interest deduction limitations have been removed from the Polish Corporate Income Tax Act.

From a tax perspective, an increase in share capital may result from:

• Contributions made by existing or new shareholders;
• Allocation of the company’s net profit to share capital; or
• Transfer of amounts from other equity reserves to share capital.

Tax consequences for the company and the contributing shareholder

For the company receiving a monetary or non-monetary contribution to increase its share capital, the event is tax-neutral. The exemption under Article 12(4)(4) of the Corporate Income Tax (CIT) Act is general in nature and applies regardless of the legal form of the increase; whether through an amendment to the articles of association, in simplified form, or by creating new shares or increasing the nominal value of existing ones, or whether the contribution is in cash or in kind. 

The key condition for applying the exemption is compliance with the procedural rules for increasing capital, and registration of the increase in the company register. The exemption applies irrespective of the nature of the contribution, the status of the shareholder (domestic or foreign, individual or corporate), or the source of financing.

The shareholder making a contribution to increase share capital is generally subject to the same tax rules as when establishing a company. Registration of the capital increase in the National Court Register (KRS) is constitutive.

Conversion of receivables into share capital

Conversion of debt into share capital is a useful legal mechanism for companies operating in Poland, allowing them to reduce debt owed to shareholders in a relatively straightforward manner. A shareholder may contribute a receivable in kind (debt-for-equity swap), or contribute cash and perform a contractual set-off. The tax consequences depend on the form of the contribution.

A cash contribution is tax-neutral for both the company and the shareholder. The shareholder does not recognise income at the moment of the contribution, and the expenditure incurred for acquiring shares becomes tax-deductible only upon disposal of the shares.

If the shareholder contributes a receivable in kind, income must be recognised at the fair market value of the contribution. The tax consequences also depend on how acquisition costs are treated for tax purposes.

Tax consequences of converting receivables

Most often, a shareholder’s receivable from the company results from a loan, less frequently from the provision of services or goods – so-called proprietary receivables. Until 2019, there were doubts whether such proprietary receivables could be recognised as a tax-deductible cost. The Polish government has since clarified how such contributions should be treated.

For loan receivables, the tax-deductible cost is the amount transferred to the company’s bank account, but no more than the fair market value of the contribution. For proprietary receivables (non-loan), if the value of the receivable was previously recognised as taxable income by the contributing shareholder, it may also be recognised as a tax-deductible cost.

Conclusion

Debt-to-equity conversions in the form of share capital increases ceased to be clearly unfavourable for taxpayers in Poland only after 2019. Before that, the lack of specific rules on cost recognition for contributed receivables meant that recognised income immediately became taxable profit. As a result, taxpayers often avoided this method due to its low tax efficiency.

Legal acts related to increasing the share capital of capital companies are often complex and require careful consideration in terms of civil law, commercial law, and tax consequences.

It is advisable to consult a tax advisor beforehand, who can recommend a safe and cost-effective solution.

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Norbert Tulak is a tax advisor and lawyer, continuing his studies as a doctoral student and student of the Executive MBA programme conducted by the Warsaw School of Economics. He is the author of various publications on civil and tax law in academic journals and specialist presses, including the tax section of Forbes magazine.