The Warsaw Voice » Law » Monthly - September 5, 2007
ADVICE FROM SALANS
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Roll up! Roll up! Corporate investors!
   
You might just be able to increase your depreciation costs and cut your tax bill. Sounds good? Have you recently made or are you contemplating making an in-kind contribution? This year you have one last chance to increase the initial value of fixed assets up to their market value at the time of making an in-kind
contribution into a limited-liability company of a business or standalone division of a business (a so-called "enterprise" or "organized part of an enterprise").


An increase of this type would allow you to raise the base for calculating depreciation write-offs and so enable you to increase your depreciation costs and as a result decrease the amount of tax due. It is a special case and the window of opportunity will soon close. Generally, Polish tax law does not let taxpayers voluntarily increase the initial value of fixed assets (for example, real estate).

A change in the value of a fixed asset is possible only in the situations set down in the Corporate Income Tax Act-mainly when it is paid for or contributed in kind. In such cases, the purchaser of the fixed asset (real estate) may enter the real estate on the fixed assets register at a value equal to its purchase price (i.e. its market value) and not the value contained in the accounting books of the seller. Nevertheless, the sale of the real estate or acquisition of shares in return for a contribution in kind gives rise to taxation of the seller's income on the amount constituting the difference between the selling price or the nominal value of the shares held in return for the contribution in kind and the costs of purchasing or developing the real estate, reduced by the depreciation write-offs.

Up until Dec. 31, 2006, the provisions of the Corporate Income Tax Act, as a rule, also provided for the possibility of increasing the initial value of the real estate up to the market value in a situation where the real estate in question was a component of an enterprise contributed in kind or an organized part of the same. At the same time, no taxable income arose on the date of contribution for the company making the contribution in kind of an enterprise or organized part thereof.

In the light of the provisions binding from Jan. 1, 2007, an entity receiving an in-kind contribution in the form of an enterprise or organized part thereof is obligated to accept the initial value of the real estate forming part of its in-kind contribution in the amount entered in the land and mortgage register of the contributing entity. Moreover, the company receiving an in-kind contribution of an enterprise or organized part thereof is obligated to continue with the depreciation policy used to date by the in-kind contributor with respect to the particular fixed assets. This means that in the case of an in-kind contribution of an enterprise or organized part thereof, it is not, as a rule, possible to increase the initial value of any real estate that constitutes a part of the accepted enterprise or organized part.

Nevertheless, transitional provisions of the law amending the Corporate Income Tax Act allow for the possibility of benefiting from prior regulations which are beneficial for taxpayers within the scope of an increase in initial values in the case of making an in-kind contribution of an enterprise or organized part in 2007, when the company to be contributed was set up in 2006 but its first tax year ended in 2007. In common with many other complex tax issues, do seek professional advice if you are interested in benefiting from this tax optimization possibility.

We would like to emphasize that it is only possible to benefit from the solution outlined above if the whole process of making an in-kind contribution is completed by the end of November 2007. Moreover, there is only a strictly limited number of companies on the market which can benefit from the regulations binding hitherto, i.e. those companies whose tax year began in 2006 and has not yet ended. Be warned though, if you are eligible, it is highly advisable to make a decision on any potential in-kind contribution of an enterprise or organized part thereof as soon as possible.

Karina Furga, counsel, head of the Tax Advisory Team at SALANS Warsaw