Will a tax exemption attract investors to the Warsaw Stock Exchange? | In Principle

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Will a tax exemption attract investors to the Warsaw Stock Exchange?

One of this year’s tax amendments that may affect Polish capital market participants is the income tax exemption for taxpayers investing in IPOs of companies entering the Warsaw Stock Exchange. Under certain conditions, they will be exempt from capital gains tax.

The amendment entered into effect on 1 January 2022 and was introduced by the Act of 29 October 2021 Amending the Personal Income Tax Act, the Corporate Income Tax Act and Certain Other Acts, adopted as part of the Polish Deal tax reform package.

The purpose of the regulations is to stimulate the stock market. The PIT exemption is intended to draw taxpayers’ attention to investing in publicly traded companies as a form of asset placement and to increase interest in the local market. There are also new incentives applicable to companies planning to debut on the WSE.

The changes aimed at individual investors arise from amendments to the Personal Income Tax Act.

The new regulation establishes the possibility of exemption from personal income tax for individual investors with respect to income derived from the sale of shares subscribed for or acquired by the taxpayer or the taxpayer’s testator in an initial public offering. This means that taxpayers investing in shares through an IPO of a company entering the WSE may be exempt from capital gains tax (known in Poland as the “Belka tax,” after the finance minister who introduced it in 2002).

To claim the exemption, two conditions must both be met:

  • The shares are disposed of for payment more than three years after the shares were admitted to trading on the regulated market or in an alternative trading system.
  • The taxpayer or the taxpayer’s testator who subscribed for or acquired the shares was not related to the company during the two years prior to subscription for or acquisition of the shares.

The intention is to encourage investors to invest in the stock market, despite the general obligation to pay capital gains tax.

To take advantage of the exemption, the investor cannot sell the shares within three years of their admission to trading. But for market participants, the freedom to trade share quickly can be the essence of investing in the stock market. Often, the intention behind such an investment is to sell the shares shortly after purchase, especially in the case of new companies debuting on the WSE, whose shares have not yet been tested by the market. Investors often decide to participate in a new issue only to flip the shares at a profit right after a successful debut.

It can be expected that the exemption will be of more interest to active investors who, thanks to their experience in share trading, will find it easier to assess the debuting company from the market perspective.

But it is difficult to assess whether the exemption will encourage new investors to invest in the stock exchange. The prospect of holding securities for three years to avoid taxation may prove to be too long and unattractive compared to investing in other assets that are widely recognised and considered less risky.

Danuta Pajewska, attorney-at-law, Katarzyna Jaroszyńska, attorney-at-law, Aleksandra Nowacka, M&A and Corporate practice, Wardyński & Partners