Ruling description

The Provincial Administrative Court in Wrocław found in its judgment of November 16, 2015 (case file no. I SA/ Wr 1563/15) that if a limited liability company undergoing liquidation (the "Company") transfers its assets in kind as liquidation proceeds to its sole shareholder, the Company will have earned revenue subject to CIT pursuant to Article 14a(1) of the CIT Act.

Comment

This ruling is worthy of notice as it is probably the first ruling to be handed down by an administrative court concerning the tax consequences faced by a company in liquidation making an in-kind transfer of assets to its sole shareholder following the addition of Article 14a to the CIT Act.

Before Article 14a of the CIT Act came into force, the administrative courts usually tended to rule that a handover of assets of a company in liquidation to its shareholder did not make the company liable to pay CIT since a transfer of this kind does not benefit the company in any way. Now, pursuant to Article 14a of the CIT Act (which applies, in principle, as of January 1. 2015), if a taxpayer renders a non-monetary performance and thereby settles its liabilities, whether in whole or in part ― including its liability to repay a loan/credit facility, pay dividends, redeem shares or sell shares in order to redeem them the taxpayer is considered to have earned revenue in the amount of the liability settled as a result of the performance. The new regulation does not explicitly say that it applies also to transfers of assets as part of the company liquidation process.

In the case reviewed here the Company argued that the transfer of its assets to the shareholder is being made by operation of law and it therefore cannot be interpreted as a non-monetary performance intended to fulfill any obligation of the Company. The tax authority and then the court hearing the case both disagreed with this position, arguing that Article 14a of the CIT Act does not contain an exhaustive list of events triggering taxable revenue and that the situations it does list are just some examples of what is being referred to. Therefore, when considering the provisions of the Commercial Company Code applicable to liquidations of companies, the court decided that in the case at hand the Company will in fact have fulfilled an obligation towards its shareholder, namely the obligation to hand over what is known as the liquidation amount, which in this particular instance will be in the non-monetary form of the Company's assets.

Article 14a of the CIT Act is a source of controversy and we will definitely be seeing more judgments elaborating on the rules of its interpretation. That said, the ruling reviewed here may signal an emerging trend that will prove unfavorable for taxpayers transferring assets as part of liquidations of companies.

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