While in the case of demerger by split-up, i.e. demerger where the demerged company ceases to exist, it is clear that the tax liabilities are transferred to the successor companies, it is less clear to what extent the tax liabilities are transferred in the case of demerger by spin-off, i.e. in cases where the demerged company does not cease to exist as a result of the transformation.
Transformation by demerger involves the transfer of the demerged company’s net assets to one or more successor companies. The demerged company then may or may not cease to exist as a result of the demerger.
The method and extent of transfer of tax rights and liabilities related to the transferred net assets are generally regulated by the Tax Code. Section 240 of the Tax Code states that if a legal entity ceases to exist with a legal successor, its tax liability is transferred to the legal successor. Until the end of 2013, this provision additionally stated that if a legal entity ceased to exist as a result of a demerger without a clear indication to what extent the tax liability would be transferred to its legal successors, legal succession concerning tax liabilities would be determined by the tax administrator.
The transfer of the tax liability was therefore more closely defined only in cases where the demerged company ceased to exist as a result of the demerger. Then it was up to the participating companies, or the tax administrator, to specify the distribution of these liabilities in sufficient detail directly in the transformation project (the extent of transfer of tax liabilities is an obligatory component of the demerger project). In practice, it meant that the participating companies could determine what tax rights and liabilities would be transferred to the successor companies.
On the other hand, in the case of a demerger by spin-off, that is transformation without the dissolution of the demerged company, the method of transfer of tax liabilities was unclear. The Supreme Administrative Court even reached a conclusion in one of its rulings that in the event of a spin-off performed while this legal regulation was in effect, the transfer of the tax liability would be possible only if the demerged company ceased to exist. In the event of spin-off where the demerged company did not cease to exist, all the tax rights and liabilities remained with the original taxpayer.
Situation after the amendment to the Tax Code in 2014
The Tax Code was amended in 2014. The definition of the transfer of the tax liability in the case of demerger by split-up was transferred to Section 240b of the Tax Code and subsequently expanded to include all cases of transformations of legal entities by demerger (not just cases where the demerged company ceases to exist). The Supreme Administrative Court confirmed the transfer of the tax liability from the non-dissolving demerged company to the successor company in the case of demerger by spin-off based on this provision. However, this ruling was issued under specific conditions. It concerned an existing tax liability (albeit one which was conditionally exempt as of the date of the legal effect of the transformation) tied to the contribution of an investment in a company pursuant to legal regulations on exemption from property transfer tax in the event of contribution in kind in a company as effective at that time.
It is therefore questionable whether the transfer of the tax liability in the event of transformation by demerger can be generalised to all cases of spin-off, and whether it is possible in line with Section 240b of the Tax Code to adjust the extent of the transfer of the tax liability from the non-dissolving demerged company to the successor companies in the transformation project at will. This consideration is crucial not just in terms of the liabilities existing as of the effective date of the spin-off due to the “cross-liability” of the companies participating in the transformation for the debts transferred as a result of the spin-off, but also due to the potential transfer of latent tax liabilities as of the effective date of the transformation.