Asset deals
Definition of an enterprise and an organised part of an enterprise
Correct classification of the subject of the transaction (i.e. as an enterprise or organised part of an enterprise or as specific assets) is of decisive importance for proper determination of the tax effects of an asset deal.
The tax regulations do not contain their own definition of an enterprise, and thus the provisions of the Civil Code are applied in this respect, under which an enterprise is an organised set of tangible and intangible assets intended for conducting business activity.
The concept of an organised part of an enterprise is defined in the tax regulations as an organisationally and financially distinct set of tangible and intangible assets within an existing enterprise, including liabilities, intended for carrying out specific economic purposes, which could also constitute an independent enterprise carrying out such purposes.
In practice, determining whether the specific subject of the transaction constitutes an enterprise or organised part of an enterprise may raise numerous doubts, which are exacerbated by the unclear and conflicting interpretations issued by the tax authorities. For this reason, transactions of this type should be preceded by a detailed legal and tax analysis to determine whether the assets in question meet the definition of an enterprise or organised part of an enterprise, particularly when certain assets (such as real estate, liabilities, etc.) are being excluded from the transaction.
Sale of a set of assets and liabilities that do not meet the conditions for recognition as an enterprise or organised part of an enterprise will be treated for tax purposes as the sale of specific assets, even if they are sold within a single transaction.
Sale of an enterprise or organised part of an enterprise
1. Corporate income tax effects for the seller
Income generated as a result of sale of an enterprise or organised part of an enterprise is subject to taxation under general rules at the CIT rate of 19%. The income is the difference between the revenue from sale of the enterprise or organised part of an enterprise and the book value (In the case of fixed assets and intangibles, this is the initial basis as reduced by amortisation; in the case of other assets, this is most often the acquisition cost).
The revenue from sale of an enterprise or organised part of an enterprise is generally the sale price, provided that it should be determined at market value. For this reason it is recommended to obtain an independent appraisal confirming that the sale is made at market value (in case of a potential dispute with the tax authorities).
2. Corporate income tax effects for the buyer
Acquisition of an enterprise or organised part of an enterprise may generate goodwill, which is the excess of the purchase price for the enterprise or organised part of an enterprise over the market value of its assets. Goodwill is subject to amortisation.
If goodwill is generated, the initial tax basis of the acquired assets making up the enterprise or organised part of an enterprise is established for purposes of amortisation at their market value. Otherwise, the initial tax basis will be the purchase price minus the value of assets included in the enterprise or organised part of an enterprise that are not subject to amortisation as fixed assets or intangibles.
3. Indirect taxes (VAT, transaction tax)
Sale of an enterprise or organised part of an enterprise is not subject to VAT.
Sale of an enterprise or organised part of an enterprise is subject to the tax on civil-law transactions under general rules, i.e. the sale of each asset included in the enterprise or organised part of an enterprise is subject to tax (at 1% or 2% of the market value, depending on the type of asset). The taxpayer is the acquirer of the enterprise or organised part of an enterprise.
4. Liability of acquirer of enterprise or organised part of enterprise
The acquirer of an enterprise or organised part of an enterprise is jointly and severally liable with the seller for the seller’s tax arrears arising through the date of acquisition in connection with business operations, but the acquirer’s liability is limited to the value of the enterprise or organised part of an enterprise acquired.
In order to limit or exclude the liability of an acquirer of an enterprise or organised part of an enterprise, it is possible to obtain a certificate stating the amount of the seller’s tax arrears (following the procedure set forth in Tax Ordinance Art. 306g). The acquirer will then not be liable for tax arrears of the seller that were not indicated in the certificate. However, if the sale of the enterprise or organised part of an enterprise occurs more than 30 days after issuance of the certificate, the acquirer may be liable for the seller’s tax arrears arising after issuance of the certificate.
Sale os assets
1. Corporate income tax effects for the seller
Income from the sale of assets is subject to taxation under general rules at the CIT rate of 19%. The income is the difference between the revenue from sale of the assets and the tax basis in the books (the initial basis as reduced by amortisation).
The revenue from the sale of assets is generally the sale price, provided that it should be determined at market value. For this reason, in the case of transactions at a significant value, it is recommended to obtain an independent appraisal confirming the sale price is at market value (in the event of a potential dispute with the tax authorities).
2. Corporate income tax effects for the buyer
Goodwill cannot be generated in the case of the sale of specific assets. The acquired assets are generally subject to amortisation if their initial basis exceeds PLN 3,500. In the case of assets with a lower initial basis, the expenditures for acquisition of the assets may be recognised as deductible revenue-earning costs upon acquisition. It is important to bear in mind that certain assets (such as land) are not subject to amortisation.
3. Liability of the acquirer of assets
Under the Tax Ordinance, only the acquirer of an enterprise or organised part of an enterprise is jointly and severally liable with the seller for the seller’s tax arrears arising through the date of acquisition. This means that the acquirer of assets is not liable for the seller’s tax arrears.
4. Indirect taxes (VAT, transaction tax)
The sale of specific assets that constitute goods or services under the VAT Act is subject to VAT at the basic rate (23% as of 2017), unless a reduced VAT rate or VAT exemption is available in the specific instance (e.g. the exemption for buildings and other structures under certain conditions).
In the case of a VAT exemption for specific items (e.g. real estate), their sale will be subject to the tax on civil-law transactions at the rate of 2%. Transaction tax is payable by the buyer.