Simple joint-stock company and income tax – what do you need to know?

Since 2021, it has been possible to conduct business activity in the form of a simple joint-stock company (PSA).

The PSA was intended to address the challenges of the modern economy – no barriers to entry, simplified profit distribution and faster liquidation, in short – the ideal legal form for start-ups. However, entrepreneurs still approach this legal form with a certain degree of caution.

A few words about the specific rules governing the operation of a simple joint-stock company

In a PSA, shares do not constitute share capital (as is the case with other capital companies). The value of the shares is detached from the amount of share capital. This capital consists, among other things, of shareholders’ contributions and may amount to as little as PLN 1. PSA shares have no nominal value, and the company does not distinguish between reserve capital – consequently, there can be no surplus related to the acquisition of shares above their nominal value (agio).

Additionally, as in partnerships, shares in a simple joint-stock company may be acquired in exchange for work or services, which makes it an even more convenient legal form for those who are just starting their business. Importantly, unlike in partnerships, PSA shareholders are not liable for the company’s obligations with their own assets.

Shares in a simple joint-stock company must be dematerialised and recorded in a simplified register of shareholders. Such can be kept, for example, on a blockchain (the Polish Commercial Companies Code explicitly refers to a distributed and decentralised database). PSA shares are not admitted to organised trading, so if the company grows and wishes to access the public market, it must be transformed it into a joint-stock company.

PSA also allows for the distribution of funds from share capital. However, no payment to shareholders may result in the company losing, under normal circumstances, its ability to settle its due financial obligations within six months of the date of payment.

However, if the share capital of a simple joint-stock company falls below 5% of the total liabilities resulting from the last financial statements, the company is obliged to restore this capital by allocating at least 7% of its profit for the given financial year to it.

How is a simple joint-stock company taxed?

General rules

A simple joint-stock company is a capital company and therefore a CIT taxpayer. As a rule, a PSA is subject to income tax on the same terms as other capital companies – it is entitled to similar allowances and exemptions, a reduced (9%) CIT rate, or to opt for Estonian CIT taxation. However, due to the specific structure of a PSA, there may be some differences in taxation.

The first ones occur already at the transformation stage. Bearing in mind that there is no reserve capital in a simple joint-stock company, this capital, together with the existing initial share capital (Polish: kapitał zakładowy), will constitute the share capital (Polish: kapitał akcyjny) of the transformed PSA. In turn, according to the CIT and PIT Acts, the equivalent of amounts transferred to the initial share capital from other company capital constitutes income from participation in the profits of legal persons. The definitions contained in the income tax acts equate initial share capital with the share capital of a simple joint-stock company. Therefore, a literal interpretation of the regulations leads to the conclusion that the transfer of reserve capital to the share capital of the transformed PSA generates taxable income in the amount of the transferred reserve capital.

From an economic point of view, there is no gain on the part of the shareholders – the shares of a simple joint-stock company have no nominal value, so despite the transfer of amounts to share capital, their value remains unchanged. Furthermore, the provisions on the taxation of transfers to share capital do not refer directly to the transformation.

Mandatory write-offs to share capital

Income may also arise in the case of mandatory write-offs from profit to share capital when its value falls below 5% of total liabilities. In such a situation, part of the profit may be taxed three times – when the income is earned (at the company level), when part of the profit is written off to share capital (at the shareholder level) and additionally when it is distributed to the shareholder.

However, it is worth noting that for CIT taxpayers, revenue related to the transfer of amounts to share capital benefits from a withholding tax exemption on dividends – i.e. in the case of payments to capital companies based in the EEA and holding more than 10% of shares for more than 2 years (with certain restrictions)[1].

Acquiring shares in exchange for work/services

A tax-advantageous solution for shareholders of a simple joint-stock company is to acquire shares for contributions in the form of work or services. As a rule, non-cash contributions are subject to income tax – however, the legislator has extended the exemption from taxation of contributions in the form of work/services to PSA shareholders. Nonetheless, it is worth remembering that when selling shares acquired in this way, the shareholder will not include the expenses incurred to acquire them (i.e. the value of the work/services) in their tax-deductible costs.

Distributions to shareholders

Differences in the taxation of a simple joint-stock company may also arise in the distribution of funds from the company – in addition to ordinary dividends from profits, PSA also allows for payments from share capital. Income from a reduction in share capital constitutes capital gains for shareholders who are legal persons, and in the case of natural persons, it constitutes income from monetary capital.

Furthermore, in interpretations[2] issued on the basis of the PIT Act, the Director of the National Tax Information confirmed that a shareholder receiving payments from share capital (regardless of whether these funds come from contributions or generated profits) will not be entitled to reduce this income by the costs of obtaining it. Income from payments from share capital to legal persons (other than dividends) will also not benefit from the exemption referred to in Article 22(4) of the CIT Act.

Reorganisations

The exchange of shares involving a simple joint-stock company – unlike other capital companies – will not be neutral under the CIT Act. The provision on the neutrality of share exchanges applies, inter alia, on condition that the acquiring company and the company whose shares are being acquired are entities listed in the annex to the CIT Act. However, only joint-stock companies and limited liability companies are listed there. At the same time, as emphasised by the tax authorities, a PSA cannot be equated with a joint-stock company – and therefore the exchange of shares by a PSA may result in income subject to CIT[3].

In turn, with regard to mergers involving a simple joint-stock company, the Director of the National Tax Information issued two tax ruling confirming the tax neutrality of an acquisition made by a simple joint-stock company[4]. Interestingly, a similar problem should arise in this case, as the provisions excluding the generation of taxable income in the case of mergers and divisions apply to the entities listed in the annex to the CIT Act[5], among which PSA is not included.

Taking above into account, before deciding on a reorganisation involving a simple joint-stock company, it is advisable to review the current interpretative practice and take steps to mitigate any potential tax risks.

Summary

A simple joint-stock company certainly offers its shareholders a great deal of flexibility. Minimum share capital, the possibility of direct distribution from share capital or the acquisition of shares in exchange for work – these are just a few of the benefits of operating as a PSA. This type of company may prove to be a bull’s eye for, among others, innovative businesses for which time and low thresholds at the start are important. However, it is worth carefully analysing the tax implications of operating in this form in order to avoid unforeseen financial burdens.

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[1] Article 22(4) of the CIT Act.

[2] Interpretations of the Director of National Tax Information of 20 April 2023, ref. no. 0112-KDIL2-2.4011.68.2023.2.MM and of 2 May 2023, ref. no. 0115-KDIT1.4011.72.2023.2.MT.

[3] Cf. Interpretation of the Director of National Tax Information of 22 November 2023, ref. no. 0111-KDIB2-1.4010.395.2023.1.DD.

[4] Interpretations of the Director of National Tax Information of 29 September 2023, ref. no. 0114-KDIP2-1.4010.389.2023.4.JF and of 9 November 2022, ref. no. 0114-KDIP2-2.4010.105.2022.2.SP.

[5] i.e. Article 12(4)(3e-3h), 12 and 25 of the CIT Act.