Exchange of shares in a limited liability company

The Commercial Companies Code does not control the exchange of shares in a limited liability company. This tax institution has its origin in Community law. Council Directive 2009/133/EC of 19 October 2009, which is currently in force, regulates the exchange of shares. What is the exchange of shares in a limited liability company? When can it occur? Is a valuation of the in-kind contribution required? Find answers to these questions in this article.

Table of Contents

• Exchange of shares in a limited liability company – definition in accordance with income tax Acts
• Exchange of shares in a limited liability company – what does it involve?
• Exchange of shares in a limited liability company – additional conditions of tax neutrality
• Exchange of shares in a limited liability company – when can it take place?
• Exchange of shares in a limited liability company – valuation of an in-kind contribution
• Summary

Exchange of shares in a limited liability company – definition in accordance with income tax Acts

The definition of the exchange of shares results from the following provisions:

• Article 24(8a) of the Personal Income Tax Act of 26 July 1991,
• Article 12(4d) of the Corporate Income Tax Act of 15 February 1992.

According to the aforementioned provisions, if a company acquires from a shareholder of another company shares (stocks) of that other company and in exchange it transfers to its partner:

• Its own shares (stocks) or
• Its own shares (stocks) together with a cash payment not exceeding 10% of their nominal value (and in the absence of a nominal value – their market value),

and if, as a result of the acquisition:

1. the acquiring company obtains an absolute majority of voting rights in the company whose shares (stocks) are acquired, or
2. the acquiring company, having an absolute majority of voting rights in the company whose shares (stocks) are acquired, increases the number of shares in this company,

revenues do not include the value of shares (stocks) transferred to a shareholder of this other company. Moreover, revenues do not include the value of shares acquired by the company. However, there is a condition that entities participating in this transaction are subject to taxation on their total income in a Member State of the European Union, or in another country belonging to the European Economic Area, regardless of where they are earned.

Exchange of shares in a limited liability company – what does it involve?

To put it simply, the exchange of shares in an LLC consists of two elements:

1. The acquisition of shares in one company (the acquired entity) by another company (the acquiring entity),
2. The issuing by the acquiring company of its own shares to the shareholder of the acquired company.

Exchange of shares in an LLC takes place when the shares contributed in kind give the acquiring company an absolute majority of votes in the acquired company. An absolute majority of votes should be understood as more than half of the votes. This means a share exceeding 50% of the company’s share capital.

However, you should remember that the CCC provisions provide for the possibility of preferential rights concerning shares in an LLC. Pursuant to Article 174 § 3 of the CCC, such privileges may concern, in particular, voting rights. In such a situation, an absolute majority of votes may be held by a person who holds a share not exceeding 50 % of the company’s share capital. In the case of an in-kind contribution to an LLC in the form of shares of another company, which does not result in the acquisition of an absolute majority of votes, separate regulations will apply.

Exchange of shares in a limited liability company – additional conditions of tax neutrality

Regardless of the need to acquire an absolute majority of votes, the legislator provided for additional restrictions on the tax neutrality of the exchange of shares in an LLC:

1. The acquiring company and the company whose shares (stocks) are acquired are entities specified in Annex 3 to the income tax Acts. Alternatively, they are subject to income tax on their entire income in a country other than a Member State of the European Union but belonging to the European Economic Area, regardless of where it was earned.
2. A shareholder is a taxpayer of income tax. The shares he contributes constitute an in-kind contribution intended entirely or partially to increase the share capital of the acquiring company, and
3. The shares (stocks) being sold by the shareholder have not been acquired or owned as a result of another transaction concerning the exchange of shares. Moreover, they have not been previously allocated as a result of a merger or division of entities, and
4. The value of shares (stocks) acquired by a shareholder and accepted for tax purposes is not higher than the value of shares sold by that shareholder, which would have been accepted for tax purposes if the shares had not been exchanged.

The legislator has also made the tax neutrality of the share exchange conditional on the existence of legitimate economic reasons for such a transaction. In their absence, there is a presumption that the main purpose of the exchange is to avoid or evade taxation. This results in the impossibility to apply the provisions on the exchange of shares.

Exchange of shares in a limited liability company – when can it take place?

In light of the CCC provisions, we can deal with the exchange of shares in an LLC in the following cases:

1. In the situation of creating a new company.
2. In the situation of increasing the share capital of an existing company.

When it comes to the first scenario, the rules governing the formation of capital companies when the contribution to a new entity consists of shares in another company will be in force. In the second case, regulations relating to the increase of share capital in a limited liability company will apply.

The exchange of shares in an LLC is not possible when registering or amending the company’s agreement using the contract template. As a rule, the S24 portal can be used for limited liability companies. However, with its use, it is possible to take up shares only for cash contributions.

Exchange of shares in a limited liability company – valuation of an in-kind contribution

The provisions of the CCC differentiate the valuation of in-kind contributions in relation to different types of capital companies. In the case of limited liability companies, the legislator abandoned the requirement to evaluate the in-kind contribution. Its value can therefore be estimated by the partners themselves. When it comes to joint-stock companies the valuation of an in-kind contribution is also necessary but it must be verified by the expert auditor.

Summary

In business transactions, it often happens that shares in the increased share capital of an LLC are acquired in exchange for an in-kind contribution. It may take various forms. The subject of the contribution may also be shares of another capital company. What is important, the exchange of shares in a limited liability company is tax neutral when it is made for justified economic reasons. Where the main purpose of the exchange is avoiding taxation, the provisions on neutrality do not apply.

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