Should the recapitalization of a company be reported as a tax scheme?

Doing business in a constantly changing market requires a high degree of flexibility and the ability to react quickly and adequately to emerging difficulties, but also to spot opportunities for development.

Regardless of the size of the company – such flexibility often requires adequate financial security. Both when it comes to a quick resolution of unexpected crises, as well as when encountering new investment opportunities.

However, when that moment comes, the company does not always have the resources necessary to respond adequately to the new situation. Companies facing this problem usually reach for additional capital from available sources. Necessary funds can be obtained directly from the owners (shareholders) or external entities (e.g. banks).

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Recapitalization of a company

Depending on the legal form and financial situation, companies can be recapitalized in three ways:

• by loan,
• by increasing the share capital,
• by additional contributions.

Each of these methods involves certain costs, formalities and tax consequences. Should such recapitalization be reported as a tax scheme? To answer this question it is necessary to go a little deeper into the regulations defining tax schemes.

What is a tax scheme?

According to the provisions of the Polish Tax Ordinance, a tax scheme is understood as arrangements that:

• meet the main benefit criterion and have a general identifying characteristic,
• have a specific identifying characteristic, or
• have other specific identifying characteristic.

In addition, the Act identifies standardized tax schemes, i.e., tax schemes that can be implemented or made available to more than one beneficiary without changing their essential assumptions, in particular regarding the type of activities undertaken or planned under the tax scheme, and cross-border tax schemes, which, in addition to meeting the main benefit criterion and having any of the general identifying characteristic or special identifying characteristic indicated in the Tax Ordinance, also meet the cross-border criterion.

Arrangements and benefits

“Arrangements” mentioned in these provisions means an action or set of related actions, including a planned action or set of planned actions, of which at least one party is a taxpayer or which has or may have an effect on the occurrence or non-occurrence of a tax obligation.

The benefit referred to in the Act may be:

• the non-occurrence of a tax obligation, the postponement of the occurrence of a tax obligation or the reduction of its amount,
• occurrence or overstatement of a tax loss,
• occurrence of overpayment or right to tax refund or overstatement of the amount of overpayment or tax refund,
• lack of the taxpayer’s obligation to charge the tax if it results from the non-occurrence of a tax obligation, the postponement of a tax obligation, or a reduction in the amount of a tax obligation,
• increase in the amount of excess of input tax over output tax,
• non-occurrence or postponement of the obligation to prepare and submit tax information, including information on tax schemes.

Identifying characteristics

Art. 86a §1 of the Tax Ordinance sets out a detailed list of general, specific and other specific characteristics that determine whether an arrangement should be classified as a tax scheme. Examples of such characteristics may be a change in the classification of income (revenue) to another source of income (revenue) or a change of taxation rules, which results in actually lower taxation, exemption or exclusion from taxation. Also the fact of using the services of a tax advisor, whose salary will depend on the tax benefit obtained, may constitute a general identifying characteristic of a tax scheme.

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When is a recapitalization of a company a tax scheme?

The mere fact of increasing the company’s capital is not yet a sufficient prerequisite for the obligation to report the tax scheme. What is of key importance here, however, is the manner in which the increase will be carried out. If the actual main criterion for the choice of the recapitalization method is a tax benefit, which will be achieved at least as a result of the reclassification of revenues to another source – such a recapitalization will meet the statutory criterion of main benefit and having a general identifying characteristic.

In practice, the situation described above may occur, for example, when a part of the contribution intended for the capitalisation of the company is credited to the supplementary capital (agio) in order to reduce the amount of the tax on civil law transactions, instead of crediting the entire contribution to the share capital.

Also, in the case of conversion of debt into share capital, that is when the creditor agrees to receive shares in the company instead of repayment of the loan, reporting may be necessary. An increase in share capital in this way is not taxable – so it is possible that it will be a tax benefit.

Therefore, when making a decision to increase the company’s capital, it should be examined on a case-by-case basis whether the chosen method of action meets the conditions that determine the classification of the arrangement as a reportable tax scheme.

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