IPO tax credit, i.e. benefits for stock exchange debutants and investors
Starting from 1 January 2022, two tax credits closely linked to the Initial Public Offering (IPO), or, in a nutshell, the stock market debut of a company, have been introduced into income tax laws.
The first of the two IPO tax credits is aimed at corporate income tax payers deciding to conduct such an IPO. The tax credit consists in the possibility of deducting from the tax base a specific category of expenses incurred in the preparation and conduct of the IPO (the so-called issuer’s tax credit).
The second tax credit applies to individuals. Individual investors who decide to invest in a company as part of its initial public offering can take advantage of a tax exemption (individual investor tax credit).
The introduction of the new solutions stems from the desire to simplify the acquisition of financing on the stock exchange. Issuer tax credit is intended to help achieve this by reducing the financial burden involved in conducting an IPO. Individual investor tax credit, on the other hand, is intended to encourage taxpayers to invest in newly listed companies – assumed to be more innovative – through the possibility of applying future income tax exemption in the event of a subsequent sale of shares.
Issuer tax credit
The tax credit is introduced by virtue of Article 18ed of the CIT Act, which allows for the deduction from the tax base of certain expenses incurred directly for making an initial public offering relating to shares (within the meaning of Article 4(5) of the Act on Public Offerings and Conditions for Introducing Financial Instruments to Organised Trading and Public Companies of 29 July 2005), with the intention of applying for admission to trading on a regulated market or with the intention of applying for the introduction of such shares to trading in an alternative trading system.
An initial public offering is understood to be the first public offering of specific securities (here: shares).
A public offer for the purposes of the settlement of the tax credit is a public offer of securities within the meaning of Article 2(d) of Regulation 2017/1129 , according to which:
“offer of securities to the public’ means a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe for those securities. This definition also applies to the placing of securities through financial intermediaries.
At this point, it is immediately worth noting that the tax credit applies only to initial public offerings of shares. In other words, the tax relief is not available to companies already listed but conducting a subsequent public offering of shares and to taxpayers conducting an initial public offering of securities other than shares (bonds)..
A public offer both on a regulated market as well as in an alternative trading system is eligible for the tax credit. This includes both the main market of the Warsaw Stock Exchange and the NewConnect market.
The tax credit boils down to the ability to deduct of a specific category of expenses from the income tax base, after prior settlement, the research and development tax credit, the innovative employee tax credit, the prototype tax credit, the tax credit for enhanced sales and the consolidation tax credit.
The deduction includes:
- 150% of the expenses for the preparation of the prospectus, notarial, court, stamp and stock exchange fees and the preparation and publication of announcements required by law,
- 50% of the expenses, exclusive of VAT, for legal advisory services, including tax advisory services, and financial advisory services, but up to the amount of PLN 50,000.
It is also possible to deduct the tax credit from the tax base of the so-called IP Box.
It was decided to introduce a closed catalogue of expenses that are deductible under the tax credit. As a result, expenses not listed in the provision – even if incurred directly in connection with the IPO – are not deductible. It should be noted that the catalogue of expenses deductible under the tax credit does not include, in particular, expenses incurred for the marketing of the public offering, including, for example, expenses incurred for the so-called investor education or roadshow, i.e. expenses for familiarising potential investors with the company’s activity and introducing them to the details of the offering. These expenses, as well as expenses on other activities usually necessary to effectively support an IPO, are not deductible under the tax credit.
With regard to the first group of expenses, the legislator decided not to introduce an amount limit for the deduction and the tax base can be reduced by 150% of their sum. These costs include all fixed fees and costs whose incurrence is, for the most part, legally necessary for an IPO.
It is interesting to note the absence of a caveat about the amount of value added tax with this group of expenses, which in turn we find in the second group of costs (legal and other advisory services) included in the tax credit. If one were to consider the absence of this caveat to be a deliberate effort, it would mean that the 150% of expenses should also include an expense for the payment of input value added tax (irrespective of the potential right to deduct this tax). This, in turn, could significantly alter the amount of expenditure included in the tax credit.
The second group includes expenses on advisory services, which may reduce the tax base to a maximum of PLN 50,000, which is the upper limit of the deduction. As a rule, half of the expenses incurred on legal advice, including tax and financial advice, can be deducted. This means that the maximum deduction of expenses from the second group is available to a taxpayer that incurs at least PLN 100 k for these purposes. In this particular case, the deductible VAT will not be taken into account.
Expenses incurred directly for the purpose of making an initial public offering of shares are understood as expenses directly and exclusively related to that offering incurred in the fiscal year in which the initial public offering of shares was made or in the year preceding that fiscal year, no later than the date on which that initial public offering of shares was made. This means that it is not effective, from the point of view of settling the tax credit, to stretch the process of preparation for the initial public offering over the said period.
As the Act does not use the concept of “actually incurred” expenses, familiar from other regulations, it should be considered that for the purposes of settling the tax credit, it is not the payment of the expense but rather its incurrence/booking thereof that is relevant.
And although the tax credit literally applies to expenses (while not using the concept of tax-deductible costs), it seems reasonable to define the moment at which an expense is incurred for the purposes of the issuer’s tax credit analogously to the principles under which the moment tax-deductible costs are incurred at is recognised.
As mentioned, the deduction is made in the return for the fiscal year in which the taxpayer first introduced its shares to trading on a regulated share market or in an alternative trading system. In other words, the deduction is not available in a situation where, despite the preparations made, an initial public offering did not ultimately take place.
At this point, an important doubt should be noted – as the Act uses the notion of an initial public offering, it seems reasonable that the tax credit may apply to any public offering regardless of the structure of this public offering, i.e. whether it is a subscription of shares (issue), sale of existing shares or sale combined with an issue.
The announcements of the Ministry of Finance as well as the explanatory memorandum to the bill introducing the new tax credits seem to indicate that the incentives concerning the going public of companies are to apply to expenses related to the conduct of an initial public offering of shares structured as an issue of shares. Such conclusions also derive from other structural elements of the tax credit. Since, according to the Act, the deduction from the tax base is made in the return for the fiscal year in which the taxpayer first marketed its shares, it seems reasonable to assume that the initial public offering should have at least a mixed structure (subscription of shares and sale of existing shares). By the same token, one may wonder whether, with a mixed structure of the IPO, the tax credit should not, for example, be settled in respect of the issued shares only.
However, another conclusion can also be made, although it seems rather bold – the tax credit is available to the taxpayer that incurred the IPO expenses – and it is this taxpayer that settles the expenses incurred in their return filed for the fiscal year in which the IPO was conducted.
It is also important to remember that the expenses incurred – in order to be included in the calculation of the tax credit – cannot be reimbursed to the taxpayer or deducted from the tax base in any form.
A public limited company decides to make an initial public offering of shares. The public offering is made in 2023. The company has incurred PLN 100,000 of expenses in 2022 and 2023 in connection with the preparation of the prospectus and fees directly related to the offering, including stamp duty, notarial fees and stock exchange fees. In addition, by the date of the offering it has incurred legal, tax and financial advisory costs of PLN 60 thousand (excluding VAT). The expenses have not been deducted or reimbursed by the taxpayer in any form.
(PLN 100,000 x 150%) + (PLN 60,000 x 50%) = PLN 180,000
PLN 180,000 x 19% = PLN 34,200 (tax saving)
The expenses incurred by the company in connection with the IPO allow it to reduce its tax base in the tax year for 2023 by PLN 180,000, which reduces the income tax due by PLN 34,200.
Individual investor tax credit
The other IPO tax credit is a tax credit aimed at individuals investing on the stock market.
The tax credit consists in the exemption from income tax of income derived from the paid disposal of shares subscribed for or acquired by the taxpayer (or the taxpayer’s heir) as part of the IPO.
The exemption from taxation of income from the sale of shares subscribed for or acquired as part of an initial public offering is conditional on the combined fulfilment of two conditions:
- the disposal for consideration took place more than three years after the shares were admitted to trading on a regulated market or introduced into an alternative trading system, and
- the taxpayer or the taxpayer’s testator who acquired the shares was not a related party to the company within the meaning of the transfer pricing regulations during the two years preceding the date on which the taxpayer or the taxpayer’s testator acquired or subscribed for the shares.
Thus, the exemption is not available if the shares are sold before the lapse of three years or if there was a relationship between the investor (taxpayer) and the company whose shares were purchased during the two years prior to the purchase or subscription of the shares in the initial public offering. At the same time, the fact that the income from the sale of shares is exempt from taxation does not limit the deductibility of the loss if it occurs on the sale of the shares.
It is worth noting that the investor exemption may apply to shares both subscribed for and purchased as a result of an initial public offering. In this case, there is no doubt that the structure of the IPO is irrelevant to the application of the tax credit.
The provision introducing the tax credit entered into force on 1 January 2022 and applies to investments made as of that date. This means that it is not possible to avoid paying tax for investors that meet the conditions for taking advantage of the tax credit (related to the three-year holding period and the lack of a relationship with the company) but invested in IPO shares before 1 January 2022. Thus, the first taxpayers will benefit from the individual investor tax credit in 2025 at the earliest.
Consultant at MDDP Michalik Dłuska Dziedzic i Partnerzy