Contribution of an enterprise or its organised part to a limited liability company

Business development often forces entrepreneurs to change the legal form of their business activity. One of the most popular solutions is the transformation of the existing business or the establishment of a new limited liability company (spółka z o.o.). The main reasons for this are the limited liability of shareholders and the tax regulations introduced by the Polish Deal (Polski Ład). The formalised transformation process, as well as business considerations, often lead entrepreneurs to transfer their existing enterprise to the newly established company. This is done by contributing the enterprise or its organised part as a non-cash contribution (aport). What are the tax consequences of such a legal transaction? What exactly is an enterprise or its organised part? This article will explain the details.

What is a Contribution in Kind of an Enterprise?

What Does “Enterprise” or “Organised Part of an Enterprise” Mean?

The definition of an enterprise is relatively clear and does not usually cause interpretive problems. Pursuant to Article 55(1) of the Civil Code, an enterprise is an organised set of intangible and tangible components intended for conducting business activity.

It includes, in particular:

the designation identifying the enterprise or its separate parts (business name);

ownership of real estate or movable property, including equipment, materials, goods, and products, as well as other proprietary rights to real estate or movable property;

rights arising from lease or tenancy agreements of real estate or movable property and rights to use real estate or movable property arising from other legal relationships;

receivables, rights from securities, and cash;

concessions, licences, and permits;

patents and other industrial property rights;

proprietary copyrights and related proprietary rights;

trade secrets;

books and documents related to conducting business activity.

Thus, it corresponds to what is commonly called a “company” (though not to be confused with the legal term “firma” in the Civil Code, which means the entrepreneur’s business name).

Organised part of an enterprise, under tax law, means an organisationally and financially separated set of tangible and intangible components within an existing enterprise, including liabilities, intended to perform specific economic tasks, which could simultaneously constitute an independent enterprise capable of performing these tasks on its own. The key aspect is that the organised part of the enterprise must be capable of independent functioning, separate from the enterprise of which it is a part, demonstrated by financial and organisational separation.

Contribution in Kind of an Enterprise or Its Organised Part: Tax Consequences

VAT

The issue of VAT taxation on the contribution in kind of an enterprise or its organised part is relatively straightforward. Pursuant to Article 6(1)(1) of the VAT Act, “The provisions of this Act shall not apply to the transfer of an enterprise or an organised part of an enterprise,” which means that the aforementioned legal transaction is VAT-neutral. However, when contributing an organised part of an enterprise, it is important to ensure the definition is met, as tax authorities frequently challenge this during audits. If in doubt, it is advisable to seek advice from a legal tax adviser.

Corporate Income Tax (CIT)

The contribution of an enterprise or its organised part to a company does not trigger a corporate income tax liability for the company. Although under Article 12(1)(7) of the CIT Act revenue includes, among others, “the value of the contribution specified in the statute or company agreement, or, in their absence, the value specified in another document of a similar nature,” Article 12(4)(25) of the CIT Act excludes from revenue the value of a non-cash contribution when the contribution is an enterprise or its organised part to a company or cooperative. In other words, the contribution of an enterprise or an organised part to a company does not generate revenue for the company.

Personal Income Tax (PIT)

For the shareholder making the contribution, income arises equal to the nominal value of the shares received in exchange for the contribution of the enterprise or its organised part. However, pursuant to Article 21(1)(109) of the PIT Act, this income is exempt from personal income tax.

It should be noted, however, that to benefit from this exemption, the contribution of the enterprise to a capital company must be made for justified economic reasons. According to Article 12(14) of the CIT Act, if a merger, division of companies, exchange of shares, or contribution in kind (aport) is not conducted for justified economic reasons, it is presumed that the main or one of the main purposes of these actions is to avoid or evade taxation. The term “justified economic reasons” is not legally defined and is interpreted by tax authorities as meaning that the action cannot be artificial or aimed solely at obtaining tax benefits.

Civil Law Activities Tax (PCC)

The contribution of an enterprise as aport to a limited liability company is generally subject to the civil law activities tax as a change to the company agreement. The tax base is the value of the share capital or the amount by which the capital is increased. The tax rate is 0.5% (Article 6(1)(8)(a) in conjunction with Article 7(1)(9) of the PCC Act). From the tax base, one may deduct notary fees (including VAT), court fees for registration in the National Court Register (KRS), and the fee for publication of the entry in the Court and Commercial Gazette (Monitor Sądowy i Gospodarczy). It is important to note that the tax liability rests with the company, not the shareholder making the contribution.

The PCC declaration (form PCC-3) must be submitted and the tax paid within 14 days from the date the tax obligation arises, i.e., from the date of the contribution.

In summary, when contributing an enterprise or its organised part to a company, entrepreneurs should expect to pay only the civil law activities tax. They benefit from numerous tax exemptions and exclusions under VAT and income taxes. However, it is always essential to verify that the contributed object actually meets the definition of an enterprise or an organised part of an enterprise, and in case of doubts to seek professional legal adviser assistance.