As of September 15th of this year, new regulations in the Polish legal system allow for cross-border transformations. These regulations enable changing the country of a company's registered office while preserving full continuity of rights and obligations of the transformed entity, along with its history, know-how, and contracts. There is no longer a need to go through liquidation processes.
It's worth starting with the judgment of the Court of Justice of the European Union in the case of Polbud - Wykonawstwo sp. z o.o. dated October 25, 2017 (C-106/16). This precedent was a crucial starting point for shaping the situation of Polish entrepreneurs wanting to relocate their company to another EU country. The Court of Justice of the EU confirmed in its ruling that the freedom of establishment of companies within the European Union includes the right of such companies to transform into companies under the law of another member state, under certain conditions.
Based on this judgment, companies had the possibility to relocate to another country, but this was done through the liquidation of the company. The new regulations significantly facilitate this process and affect the legal certainty and consequences of such an operation, especially concerning legal succession, protection of the interests of employees, shareholders, and creditors.
The new regulations allow cross-border transformations for capital companies: limited liability companies (sp. z o.o.), joint-stock companies (SA), and simplified joint-stock companies, as well as limited partnership with shares.
A fundamental element of cross-border transformations is determining the applicable law. Based on this, it will be determined which documents the company must compile and what issues it will have to address.
According to EU directives and Polish regulations, before receiving a certificate of compliance with cross-border transformation with national law, the transformation is subject to the law of the country where the registered office of the transforming company is located.
After obtaining such a certificate, the further procedure is subject to the law of the country where the registered office of the transformed company is to be located.
The cross-border transformation plan is a key document in this process and must contain various elements, such as the legal form and registered office of the transforming and transformed companies, the draft agreement or statute, the transformation schedule, rights granted to shareholders, creditor protection, benefits for members of the company's bodies, and many others.
Another document that must be prepared is the board of directors' report.
The board of the transforming company is responsible for preparing a report explaining the legal and economic aspects of the cross-border transformation. This document aims to provide information to both shareholders and employees of the company.
The report for shareholders must include information on, among other things, the price of buying shares, the effects of the transformation on shareholders and their rights and legal remedies.
On the other hand, the report for employees should focus on the effects of the transformation on employment relationships and measures to protect those relationships.
It's also important to consider the issue of share buyback by shareholders who voted against the transformation resolution. They have the right to request the buyback of their shares.
A shareholder who has requested buyback and does not agree with the buyback price may file a claim for additional monetary compensation within two weeks from the date of the cross-border transformation resolution. Importantly, from the perspective of other shareholders and the company itself, filing a claim does not suspend the buyback or the registration of the cross-border transformation.
Creditors of the transforming company can, within a month from the date of disclosure or provision of the cross-border transformation plan, demand security for their claims that did not become due at the time of disclosing or providing this plan, if it is likely that their satisfaction is jeopardized by the transformation.
An important provision for creditors is that for two years from the date of transformation, creditors whose claims arose before the disclosure or provision of the cross-border transformation plan may pursue their claims before the court with jurisdiction according to the registered office of the transforming company. There is no risk that they will have to enforce their rights in a different European country.
The board of the transformed company must apply for a certificate of compliance with national law for the cross-border transformation. This document confirms the legality of the process.
This is one of the more complex stages in the case of transforming a Polish company. To obtain the certificate, several documents must be provided. In addition to the previously mentioned documents, the application must include, among other things:
• an opinion of employee representatives, or in the absence of such representatives, the employees, if the board received it in a timely manner;
• an opinion of an expert or a copy of the consent of all shareholders of the transforming company to waive the requirement to have the transformation plan examined by an expert and to have the expert issue an opinion;
• employee comments on the cross-border transformation plan;
• a copy of the cross-border transformation resolution;
• a statement signed by all members of the board that the cross-border transformation resolution has not been challenged within the prescribed period or that the action to challenge it has been definitively rejected, or the deadline for filing an appeal has expired;
• a copy of the written waiver by all parties entitled to challenge the cross-border transformation resolution;
• a statement signed by all members of the board regarding the method of implementing the rights of creditors and shareholders arising from the provisions of the law and the cross-border transformation resolution;
• a statement by the board regarding the purpose of the cross-border transformation;
• a statement by the board regarding the actual place of management or economic activity of the company after the date of the cross-border transformation;
• a statement by the board on whether proceedings related to employee participation have commenced, if required by separate regulations;
• a certificate from the Social Insurance Institution regarding the number of insured persons and the absence of arrears in contributions on the last day of the month preceding the month of the application for a certificate.
As part of this process, it is also necessary to submit an application for an opinion by the Head of the National Revenue Administration (Szef KAS). In this procedure, the Head of KAS assesses whether there is reasonable suspicion that carrying out the cross-border transformation of the company may constitute a transaction aimed at tax avoidance or whether the cross-border transaction may be the subject of a decision with the use of measures restricting contractual benefits. Additionally, the Head of KAS assesses whether the cross-border transformation may constitute abuse of law as referred to in Art. 5 (5) of the Act of March 11, 2004, on Goods and Services Tax.
Although the process of cross-border transformation of companies is usually tax-neutral, there is an important issue that entrepreneurs should take into account. This concerns the taxation of unrealized profits of the transforming company, known as exit tax.
In the case of cross-border transformations, a company can change its place of taxation. This means that unrealized profits of the company, which would be taxed in the original country of the registered office, will be subject to taxation at a rate of 19% for unrealized profits.
According to Article 19 of the Corporate Income Tax Act, for taxpayers whose revenues for the tax year did not exceed EUR 2,000,000, the tax rate
is 9% (instead of 19%) of the tax base (excluding profits from capital gains).
However, there is a limitation related to reorganizations. If the taxpayer was formed as a result of a transformation, it cannot apply the reduced rate in the tax year in which it commenced operations and in the tax year immediately following it.
This limitation does not apply, for example, to the transformation of a company with legal personality into another company with legal personality. Therefore, for example, a limited liability company transforming into a joint-stock company can still benefit from the reduced tax rate.
The new regulations concerning cross-border transformations of companies open up new possibilities for entrepreneurs. However, this process is complex and requires careful preparation and compliance with many formal requirements. For certainty regarding the regulations and procedures, it is always advisable to consult with an experienced lawyer.
I hope this article is helpful to you. If you have any additional questions or need more information, please feel free to ask.
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