Reverse merger of companies – new tax regulations.

On 16 September 2020, the Director of the National Tax Information (Krajowa Informacja Skarbowa) issued an Individual Interpretation (No. 0111-KDWB.4010.16.2020.1.MJ). It addressed the topic of reverse mergers of companies and the possibilities in this regard under the legal framework effective from 1 March 2020.

The interpretation indicates that a reverse merger, i.e., one in which the acquiring company receives—among the assets of the acquired company—its own shares that prior to the merger belonged to the acquired company, can be carried out in two ways:

1. With an increase in share capital – this procedure assumes:
 a. acquisition by the acquiring company of its own shares within the takeover of the acquired company’s assets, which should then be redeemed in a separate “redemption” procedure,
 b. an increase in share capital resulting in the issuance of new shares to be granted to the shareholders of the acquired company;

2. Without an increase in share capital – this procedure does not involve redemption of the initially existing shares or an increase in share capital with the issuance of new shares. Instead, the shareholders of the acquired company receive own shares of the acquiring company that it acquired as a result of the merger.

The content of the interpretation concerned the second of the presented variants. According to the tax authorities, the acquiring company is entitled to exclude from taxable income the value corresponding to the issue price of its own shares acquired from the acquired company during the merger. Article 12(4)(3e) of the Corporate Income Tax Act applies also to reverse mergers in which the acquiring company does not redeem its own shares acquired from the acquired company but transfers them to the shareholders of the parent company.

Furthermore, the Director of the National Tax Information indicated that when determining the issue price, reference should be made to the applicable terms for “subscription” of shares (stocks) relevant to mergers and divisions. These terms are set in accordance with the procedure prescribed in the Commercial Companies Code. As part of this procedure, a merger plan must be determined, including a detailed share exchange ratio (Article 499 §1 point 2 of the Commercial Companies Code). Thus, the value of the acquired company’s assets is expressed in terms of shares (stocks). The case of a reverse merger cannot be excluded from these obligations; therefore, in this situation, the merger plan and the exchange ratio must also be indicated, showing the valuation of the acquired assets. Consequently, in the case of a reverse merger, the parties to the transaction should also determine the “market value” despite the absence of actual issuance of new shares (stocks). Hence, in the indicated reverse merger, the value at which shares (stocks) are subscribed will be the value of the acquired company’s assets, which should be understood as the issue price.