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Clause against tax evasion - how to apply it in the case of a merger and division of companies and the exchange of shares?

Piotr WYRWA
Tax Consultant at RSM Poland

Today, I would like you to become acquainted with the judgement of the CJEU and I would like to answer the question on how to apply the tax avoidance clause in case of a merger and division of companies and the exchange of shares.

The so-called "general principle of tax law circumvention" as specified in the General Tax Regulations Act (and described by our experts HERE) and the clause of tax circumvention introduced for VAT purposes are applied most broadly from among the regulations restricting tax evasion. Nevertheless, starting from 1 January 2017, the tax avoidance regulations were also introduced into the CIT Act (Art. 10(4 and 4a) and the PIT Act.

These regulations concern mergers and divisions of companies and exchange of shares, i.e. the transactions which, under the CIT Act, in a majority of cases are favourably taxed at the time when they are conducted. However, according to the clause introduced in 2017, these principles do not apply when the main or one of the main objectives of the merger or division of companies or exchange of shares is to avoid/evade taxation. At the same time, the CIT Act provides that if these transactions were not conducted due to justified reasons, it is presumed that the main or one of the main objectives of these actions is to avoid or to evade taxation.

At first, this principle may seem bizarre and perhaps it could be even amusing (one can say: Taxable person, prove that you are not a camel!) if not for the fact that its application may bring painful consequences for those who fail to prove that they are not a "camel". What is more, the acceptance of the "presumption" in this regard (i.e. "acceptance of an unevidenced fact based on other facts whose existence is evidenced") appears to contradict the slogans under which the "new" fair tax system is built.

However, some readers may be surprised by the fact that this is not a Polish idea (not to say "fabrication"). The possibility of making the neutrality of the merger, division and exchange of shares dependent on conducting these operations due to justified economic reasons stems from Community regulations. This results, inter alia, in the powers to interpret them by the Court of Justice of the European Union, which passed a very interesting judgement in this matter on 8 March 2017 (file ref. No. C-14/16; case of Euro Park Service).

In its judgement, the Court pointed out that Member States cannot apply the general presumption of tax frauds. The Court argued that during the verification of whether the objective of the planned transaction was tax fraud or tax avoidance, Member States cannot rely only on the predetermined general criteria but they are required to always make an overall assessment of the operation. What is more, the CJEU indicated that establishment of a general rule that automatically excludes certain categories of operations out of those that generate tax benefits without examining whether there are actual tax frauds goes beyond the scope necessary to prevent such phenomena.

Despite the fact that the aforementioned judgement was passed in relation to a French entity, it has practical consequences also for Polish taxable persons. The theses of the judgement do not mean that the regulations introduced on 1 January 2017 are inconsistent with the Community law. According to the judgement, with respect to actions of taxable persons, Poland cannot adopt a general presumption of tax frauds or tax avoidance. The tax authorities need to carry out an in-depth analysis in this respect of all the facts of the case, and the burden of proof will always lie with the tax authority.

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