Voluntary redemption of shares for cancellation without consideration. Does revenue arise?
On March 11, 2021 the Head of the National Revenue Information Service (hereinafter called: ‘the KIS Head’) issued an individual ruling ref. no. 0111-KDIB2-1.4010.465.2020.2.AP concerning CIT settlements in connection with redemption of own shares for the purpose of their voluntary cancellation without consideration.
The ruling concerned a limited Company having its business seat in Poland, which had sustained losses in the previous financial years. In order to cover the losses incurred, the Company decided to redeem and cancel its own shares, in order to decrease its share capital. The proceeds received from decreasing the share capital were to be used for covering the loss. The cancellation was to be voluntary in nature, i.e. it was to be carried out with the shareholders’ consent by way of redemption of shares by the Company. What is more, it was to be carried out without consideration.
In connection with the above, the Company had doubts whether the activity described above would result in revenue for the purposes of the CIT Act.
The CIT Act does not provide a general definition of tax revenue. However, Article 12 (1) may provide some help in defining the notion of revenue, whereby revenue comprises in particular money and monetary benefits received, including exchange rate differences. Art. 12 (3) states, in turn, that revenue connected with business activities as well as revenue earned on capital gains is deemed to comprise revenues due, even if not actually received, after a deduction of the value of returned goods, granted discounts and rebates.
Taking these regulations into account, the Company took the position that the redemption of its own shares without consideration does not give rise to revenue. It will not gain any material benefit which would ultimately increase its assets.
This position was fully endorsed by the tax authority. The director of the KIS explained that the redemption of shares in a limited liability company involves the expiry of all rights attached to these shares. A direct effect of this operation is a reduction in the total nominal value of the shares held by the shareholders.
What is more, the KIS Head pointed out that where a cancellation of shares results in a decrease in the share capital of the Company, and the funds obtained from this reduction serve to cover the losses incurred, no revenue can be said to arise as no real benefit will accrue to the Company on this account.
The present ruling, favourable to the applicant Company, confirmed the previous rulings of the tax authorities, according to which a reduction of the share capital by way of voluntary cancellation of shares without consideration does not result in revenue on the part of the taxpayer within the meaning of the CIT Act, and thus does not affect the income subject to this tax.
Natalia Szymocha, Tax Consultant, ATA Tax Sp. z o.o.
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