Category: Poland

As the first half of 2017 draws to an end, dispute resolution in Poland continues to face dynamic changes. This is due to numerous pieces of legislation being implemented as well as certain policy issues of the ruling party. We focus in this article on several trends or changes that our clients are struggling with or which might affect businesses in the foreseeable future.

The financial sector continues to be hit with consumer litigation and regulatory or criminal proceedings. In particular, banks are facing numerous claims concerning Swiss franc loans, including group action proceedings and even criminal investigations. While insurers have so far been spared from criminal investigations, unit-linked insurance still gives rise to consumer litigation, both in individual and group action cases.

Furthermore, businesses in every sector are going to be affected by the recent amendments to criminal law. In April 2017 new rules on the confiscation of assets in connection with a crime came into force, including those related to: (i) confiscation of the entire enterprise owned by an individual used to commit a crime or hide the proceeds of a crime; (ii) the imposition of compulsory company management on a corporate entity; (iii) presumption of criminal origin of proceeds regarding assets obtained five years prior to the commission of a crime. Furthermore, investigating authorities now have extended wiretapping abilities and may use evidence obtained via operational surveillance. Increased sanctions for invoice fraud (up to 25 years imprisonment) may provide incentive for developing internal control mechanisms and a system of reviewing business partners, as the authorities now verify all companies in a distribution chain and, in cases of invoice fraud, a company and its directors may now face consequences for the actions of their employees, agents, or business partners as well.

On June 1, 2017 dispute resolution legislation known as the “Creditors’ Protection Package” came into force. From now on, it will be clearer when investors in construction cases will be liable towards sub-contractors, creditors have a stronger position in enforcing their claims, general guidelines on administrative penalties will become regulated, and extended rules on settling disputes with administrative authorities will be in place. It remains to be seen whether the new law will also increase the importance and impact of group action proceedings, as it is designed to both facilitate the procedure and broaden the scope of disputes that qualify for it. 

By the end of June 2017, the implementation of the Private Enforcement Directive should enter into effect. The Act on Actions for Damages for Infringements of Competition Law provides, among others, extensive document production tools previously unknown in the Polish legal system. As these have been present in other jurisdictions and in arbitration, both claimants and respondents might wish to turn to international law firms with expertise in these fields. Such firms may also be more useful in obtaining opinions of damages experts – a crucial element in complex disputes involving infringements of competition law.

The impact of the government’s continuous policy of infringing upon the independence of the judiciary remains to be seen. In contrast to the Constitutional Tribunal, thus far the changes in common courts have not been drastic, but if the general trend upholds, courts may become less reliable for resolving disputes. This could provide arbitration or mediation a significant opportunity to become a serious alternative in resolving commercial disputes. 

Last but not least, the new act on the General Counsel to the Republic of Poland (PGRP) was implemented on January 1, 2017. As the PGRP has been granted extended powers allowing it to become the sole legal advisor and attorney for public authorities and companies, this may affect the legal industry in Poland.

The framework of resolving disputes in Poland is developing at an extraordinary pace, which continues to be a challenge for businesses but increases the importance of reliable legal advice. In view of the current trends, companies may look to extend their compliance teams and to preparing to deal with investigating authorities, particularly when it comes to handling internal and external investigations as well as the increased liability of directors.

By Malgorzata Surdek, Managing Partner, and Filip Grycewicz, Associate, CMS Poland

This Article was originally published in Issue 4.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Polish Act on Temporary Employees dated July 9, 2003 (Journal of Laws of 2003, No. 166, item 1608, as amended) has been in force since 2004. The Act contains many flaws, however, resulting in the unequal treatment of temporary employees compared to employees hired directly under employment agreements.

To better protect temporary employees’ interests, new provisions have been introduced to the Act, effective June 1, 2017.

The most important changes cover the following:

1. Period of Employment: The same user-undertaking (the entity using the services and work of temporary employees) will be able to cooperate with the same temporary employee only for a total of 18 months within a 36-month period. The 18-month limit applies both to employment agreements and civil law contracts.

A user-undertaking thus will not be able to cooperate with the same temporary employee after the lapse of this time limit, even via a different temporary work agency (an “agency”). The amended provision aims to prevent employers from circumventing the statutory time limits by concluding employment agreements with the same employee through different agencies.

2. Type of Work: A user-undertaking cannot employ a temporary employee to perform work that for the previous three months was performed by a direct employee of the user-undertaking who was released for reasons not attributed to the employee. This restriction is territorial in character. Therefore, a temporary employee cannot be employed by the same user-undertaking in any of the user-undertaking’s units located in the same municipality as the unit in which the previously released employee was employed. 

This regulation should prevent the intentional substitution of permanent employees with temporary ones.

Inspections carried out by the National Labor Inspectorate will investigate the type of work performed by the temporary employee, not the position of the previously released employee.

3. Rules on Remuneration: The new provisions impose an additional obligation on user-undertakings to submit their internal regulations on remuneration (i.e., remuneration rules or collective bargaining agreement), and to inform any agency which requests the information of any changes to remuneration rules. For its part, the agency is obliged to notify the temporary employee of the remuneration rules prior to concluding an employment agreement. This obligation was introduced in order to ensure non-discriminatory remuneration for temporary employees providing similar work to direct employees and agency employees.

4. Extension of Temporary Employees’ Agreements: To protect pregnant employees, agreements with pregnant employees who have been performing temporary work for at least two months in total that would have expired after the third month of pregnancy will be extended until the date of birth (in such cases the provisions of the 18-month employment limit will not be applied). Until now labor code regulation has not applied to temporary employees, and in order to avoid additional costs, employers were choosing not to extend the agreements of pregnant temporary employees, depriving them of their right to maternity leave. Because of this newly-automatic extension, the temporary employee will now be entitled to maternity leave and the statutory maternity allowance. 

5. Employee Records: The user-undertaking must keep records of temporary employees working on the basis of employment agreements and civil law agreements (including information on the start and end date within a period of 36 consecutive months). The user-undertaking is obliged to store this information in paper or electronic form for three years after the termination of temporary employees’ employment agreements.

6. Contact with the Agency: Agencies are obliged to provide temporary employees with the contact details of the agency’s representative to enable direct contact with the agency, as it is their official employer.

7. Financial Guarantees: Agencies must have financial guarantees (in the form of bank or insurance guarantees) in place in order to secure employee claims and sanctions imposed on agencies, and cannot have any social security payment arrears (voivodeship marshals will be obliged to monitor this). 

8. Jurisdiction: If agencies breach the rights of temporary employees, the affected employees will be able to sue them in court either in the jurisdiction of the agency’s registered address or in the jurisdiction of the place of employment.

The changes will contribute to the more equal treatment of employees employed through a temporary work agency. They will also reduce the practice of hidden permanent cooperation between a user-undertaking and the same temporary employee.

By Barbara Jozwik, Head of Labor & Employment, Schoenherr Poland

This Article was originally published in Issue 4.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Almost a year and a half after Poland’s Restructuring Law entered into force, introducing a clear separation between restructuring and bankruptcy, now is a good time to review its affects.

Before the reform, although there were two available options – liquidation bankruptcy and bankruptcy with arrangement (which provided a better chance of resuming business and continuing operational activities) – almost 85% of bankruptcies ended with liquidation of the debtors’ enterprises. The level of recovery of receivables in such proceedings was among the lowest in Europe, at an average of 60%, while in the UK and Germany it was as much as 85-90%.

The new law stressed the need to improve the efficiency of proceedings, in particular to increase creditors’ satisfaction, as well as to provide better chances of continuing business operations. Thus, the new law introduced four new types of restructuring proceedings, all designed to facilitate the reaching of arrangement with creditors, and most not only offering debtors restructuring tools, but also placing them on relatively safe ground for the distressed period in order to let them work out a solution and conduct the arrangement process.

The reform introduces new tools, such as the ability to enter into a partial arrangement with creditors who have significant influence on the debtor enterprise’s operations. It also introduces the institution of “pre-pack,” which enables the sale of all of a bankrupt’s enterprise or an organized part of its assets, where the sale operates as an enforced sale and is made on terms negotiated with an investor even before formal bankruptcy proceedings commence. Although criticized for its lack of transparency, thanks to this solution the sale is effective upon the declaration of bankruptcy rather than after months or even years of bankruptcy proceedings. 

The experience of the first year and a half of the new law shows that the change has considerably and positively influenced the number of initiated proceedings. Data from the Polish Ministry of Justice shows that as many as 543 restructuring applications were filed in the first year of the new law, out of which more than 200 resulted in actual commencement of proceedings. In 2016 over a quarter of all initiated insolvency proceedings were in fact restructuring proceedings. In addition, research indicates that the time between the appearance of the first indicators of financial problems and the commencement of proceedings has been reduced by more than 30% over previous years. This clearly indicates the increase of Polish entrepreneurs’ legal awareness, as well as proving the non-stigmatizing effect of separating restructuring from bankruptcy.  

More powerful tools on the side of entrepreneurs have resulted in an increased number of successful out-of-court and consensual restructurings, where the banks often appear as the other party. The banks often take a more open approach towards the introduction of modifications into financing structures and project requirements in crisis situations where the modifications are made on the basis of a thorough analysis of the enterprise and its financial situation and are presented to the banks at an early stage and properly applied. 

We also see increasing interest from investors in purchasing pre-packed enterprises, resulting in a “new life” for enterprises on the brink of bankruptcy.

Even though it is not perfect and still requires improvement, the reform has proven to be a major step in the right direction. I believe that the new law can play a positive and effective role in encouraging businesses to use restructuring tools instead of passively waiting for difficulties to solve themselves, which usually leads to bankruptcy. 

By Agnieszka Ziolek, Head of Restructuring, CMS Poland

This Article was originally published in Issue 4.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The OECD’s Base Erosion and Profit Shifting (BEPS) Project 

A few years ago OECD and G20 Leaders noticed that the international tax landscape had changed dramatically. The financial crisis and aggressive tax planning by multinational enterprises had resulted in significant losses to state budgets, and perceived tax evasion had become part of the political agenda. Consequently, joint actions were taken to increase transparency and the cross-border exchange of information in tax matters and to address the weaknesses of an international tax system that had created opportunities for questionable tax tactics.

BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity. These practices can obviously undermine the fairness of tax systems, as businesses that operate across borders can use BEPS to gain a competitive advantage over enterprises that only operate at a domestic level. The OECD’s BEPS package released in 2015 provides 15 Actions that equip governments with the domestic and international instruments needed to tackle BEPS and ensure that profits are taxed where economic activity and value creation occur. The BEPS project is of major significance for developing countries due to their heavy reliance on corporate income tax.

The European Commission’s Initiative 

As a follow-up to the OECD’s BEPS conclusions and in order to provide a common solution at the EU level, in mid-2016 the EU Council adopted Anti-Tax Avoidance Directive 2016/1164 (ATAD), which lays down rules against tax avoidance practices that directly affect the functioning of the internal market. In late 2016, the Commission presented a proposal to complement the Directive with a broader anti-hybrid approach.

The ATAD contains a packet of anti-abuse measures targeting the common forms of aggressive tax planning. With some exceptions, the rules should be applied by all Member States as from January 1, 2019.

Implementation of the Anti-Avoidance Rules in Poland

Poland appears willing to introduce anti-avoidance measures without prodding by Brussels. One of ATAD’s measures – the controlled foreign company (CFC) rule, which is designed to deter profit shifting to a low or no-tax country – has been in force in Poland since 2015. Generally, under CFC rules, a Polish parent company is obliged to pay corporate income tax in Poland with respect to profits generated by a subsidiary located in a low-tax country, even if no dividend payments take place. However, as Poland is not a particularly advantageous jurisdiction for holding companies, it is unlikely that this rule will have a significant impact on taxpayer behavior.

The interest limitation rule has been present in the Polish tax system for many years. The rule addresses a common situation in which intercompany debt is used instead of equity and interest deductions artificially reduce profits. Recently, however, Poland amended these rules by giving taxpayers the right to choose one of two alternative methods of computing tax-deductible interest costs. The “historical” method provides for a simple debt-to-equity ratio (currently 1:1) as a limiting factor. The newer method, which is more aligned with the ATAD’s solution, links the limitation on tax-deductible interest to such factors as company’s EBIT and the value of its assets, and applies also to interest payable to non-related parties.

Another measure – a general anti-abuse regulation – was introduced in Poland in mid-2016 and its wording is similar to the ATAD’s proposal. This rule counteracts aggressive tax planning when other rules do not apply. Due to its potential broad applicability it may turn out to be the most powerful tool used by tax authorities to combat tax dodging in Poland. The rule states that a taxpayer will be denied any tax benefit which results from an artificial arrangement aimed solely or primarily at receiving such benefit.

Other anti-avoidance measures exist or are still to be implemented in the Polish tax system but may require amending to fully comply with ATAD.

The continuing implementation of the anti-abuse packet should be viewed positively. One would hope, though, that such anti-avoidance rules and, in particular, the general anti-abuse regulation, will not themselves be abused by the tax authorities in order to shut down all tax optimization possibilities in Poland, including ones supporting legitimate business purposes.

By Anna Sekowska, Senior Associate, Wolf Theiss Poland

This Article was originally published in Issue 4.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

On May 17, 2017, a governmental draft of the act on actions for damages caused by in-fringements of Competition law (the “Private Enforcement Act”) was approved by the upper house of the Polish parliament. It is now awaiting the presidential signature. Alt-hough this legislative proposal was forced by EU Directive 2014/104/EU (the “Private En-forcement Directive”) and it mostly transposes its provisions into Polish law, it also intro-duces revolutionary changes to the law of delicts and the corresponding civil procedure.

The adoption of the Private Enforcement Act will remove certain procedural impracticalities inherent to any action for damages resulting from a Competition law infringement. Moreover, it goes beyond the measures stipulated under the Private Enforcement Directive. It is expected that the Private Enforcement Act will enter into force by the end of June, 2017.

A Set of New Presumptions

The Private Enforcement Directive introduces a presumption that cartel infringements cause harm. The scope of the implementing provision under the Private Enforcement Act is significantly broader than required under the Private Enforcement Directive, and ap-plies to any Competition law infringement, including abuse of dominant position, and ir-respective of the effect on trade between Member States.

Presumption of fault is also new to the delictual liability based on the concept of fault. While the Private Enforcement Directive does not impose a specific rule in respect of the basis for liability, the Polish legislator opted for fault-based liability (rather than risk-based liability, which indeed does not require evidence of fault). At the same time, this presumption constitutes another step beyond the Private Enforcement Directive, which does not speak of such a legal tool.

Finally, the Polish implementing measure introduces a presumption of the pass-on effect in respect of an overcharge paid by the indirect purchaser, where the infringement caused an overcharge paid by a direct purchaser and the indirect purchaser acquired products or services from the direct purchaser. Such a presumption is claimed to be in line with the goals of the Private Enforcement Directive, although addressed only in its preamble.

Taken together, the three presumptions greatly improve the position of Polish claimants by shifting the burden of proof to the defendant in respect of the causal link between in-fringement and loss.

The New Rules of Discovery

The Private Enforcement Act introduces a new discovery measure, previously unknown to the Polish civil procedure: A request for disclosure of evidence. The aim of this new evi-dentiary tool is to provide claimants with access to evidence not in their possession and which is inaccessible under the current procedure unless the precise scope of the evi-dence is known to the claimant. Pursuant to art. 16 of the Private Enforcement Act, courts, at the request of claimants able to prove the plausibility of their claims and who undertake to use the evidence only for the purpose of ongoing private enforcement pro-ceedings, will order the defendants or third parties to disclose evidence at their disposal. Furthermore, under similar conditions, courts may also compel the competition authority to disclose evidence. These discovery measures now provide an abstract description of the type of evidence which must be disclosed, as claimants are no longer required to specify the exact item or items which must be disclosed, but only the type of items and their key features.

Statute of Limitation

Probably the most crucial legislative amendments introduced by the Private Enforcement Act concern the statute of limitation for private enforcement. In most cases the current limitation period runs out while antimonopoly proceedings before the competition authority are still ongoing, which renders access to private enforcement illusory at best. The Private Enforcement Act extends the present limitation period of three years to five years. Furthermore, and more importantly, it introduces suspension rules which, in the event the competition authority takes action towards an alleged infringer, suspend the statute of limitation until one year after the authority’s decision becomes final or the proceedings are otherwise terminated. This significantly improves access to private enforcement and, in particular, access to evidence gathered in the course of antimonopoly proceedings.

By Marta Smolarz, Head of Antitrust & Competition, and Joanna Szacinska, Associate, Noerr Warsaw

This Article was originally published in Issue 4.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The new Payment Services Directive (PSD2), scheduled to enter into force on January 13, 2018, will change the established business models in the payment market. This is due to new types of payment services and new rules which oblige banks to assist third party providers (TPP) in accessing their accounts and initiating payment transactions. Much depends on how PSD2 will be transposed into national legislation, a process which should be completed by January 13, 2018.

PSD2 expands the definition of payment services by adding payment initiation services (PIS) and account information services (AIS) to the catalogue.

PIS are services in which their provider initiates a payment order at the request of the payment service user (the payer) from the payer’s account at another financial institution. The PIS provider is, in fact, a facilitator that enables the transmission of funds from the payer’s account to the payee, without the need for the payer to communicate directly with its account-holding institution (in most cases, a bank).

AIS services are intended to provide consolidated information on one or more payment accounts held by the service user in other financial institutions. An AIS provider will enable the user to receive aggregated information from payment accounts held by one or more financial institutions in a single place.

The provision of TPP services does not depend upon the existence of a contractual relationship between the TPP and the account-holding institution. Every credit institution which operates payment accounts will be obliged to have an open interface (API) in place to enable third party providers to communicate with it in order to gain access to its data or to initiate payment transactions. Under PSD2, on the one hand, institutions operating payment accounts are obliged to treat the TPP on an objective, non-discriminatory, and proportionate basis. On the other hand, banks must apply the highest measures to make their interfaces secure in order to protect the interests and data of their clients. In some countries, like Poland, banks are organizing to create a common Open API standard for national banking systems. Such projects are considered positive and beneficiary for both sides because of their universal nature, lower costs of development, and integration (e.g., the third-party provider need adapt only to a single banking interface). Banks are also eager to benefit from the Polish Open API project, which, for example, allows them to charge an additional premium free for the provision of certain information to an AIS provider which is not mandatory under PSD2.

Under Article 32 of PSD2, Member States retain the right to introduce lower regulatory requirements for companies intending to start providing services in the payments industry. Restrictions include a rule that such companies need carry on the payment service business only in their home Member State and that the average turnover in payment transactions cannot exceed the limit set by the Member State (which cannot be higher than EUR 3 million per month). In accordance with the draft Polish PSD2 implementation act, the Polish legislator has decided to use this national option to introduce the concept of a “Small Payment Institution” in the domestic legal system. This form of conducting business in Poland requires notification to the Polish Financial Supervision Authority (although no authorization from the PFSA is required), requires that the average monthly payment transactions not exceed EUR 1.5 million, and provides that a maximum of EUR 2,000 may be stored on the user’s payment account. Such entities may provide all kinds of payment services, but not PIS and AIS, which seem to be a good option for start-ups to verify whether their business model idea has the potential to become successful.

Given the above, it seems that the new regulations will create comfortable conditions and a productive environment for the financial technology community in the EU. This, in turn, should foster the development of innovative Fintech businesses. For banks, PSD2 brings substantial challenges but, as can be observed, banks are also trying not to fall behind and take advantage of the fast-changing market environment. We hope this race will ultimately benefit payment service users.

[The Traple Konarski Podrecki & Partners law firm is participating in the public consultation process related to the eventual implementation of PSD2 in Poland.]

By Jan Byrski, Partner, and Karol Juraszczyk, Legal Advisor, Traple Konarski Podrecki & Partners

This Article was originally published in Issue 4.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The corporate bond market in Poland has continued to develop steadily throughout recent years and experienced marked growth in 2016. This is mainly due to the fact that the whole market continues to function in an environment of low interest rates.

The Polish National Bank reference rate has remained at the level of 1.5 p.p. The WIBOR 3M rate currently is 1.73% and the WIBOR 6M rate is 1.81%. In 2016. There has been continuing stagnation on the share market, which has had a positive influence on the debt market.

This year – 2017 – may be a bit more difficult for the corporate bond market than last year, mainly due to the gradual growth of the share market as well as the increase of the inflation rate. This may potentially lead state authorities to increase the reference rate, which would presumably have negative consequences for the bond market. However, for the time being there is no visible stoppage on the Catalyst market.

The financial market specialists at INC Investment & Consulting report that the value of corporate bonds listed on the Catalyst market (excluding state-related entities) amounted to PLN 42.18 billion at the end of 2016, compared to PLN 37.31 billion at the end of the preceding year. At the end of last year 373 corporate bond series issued by 130 companies were listed on Catalyst. The average nominal value of one series reached PLN 31 million compared to PLN 30 million in the preceding year.

The highest total values of bond series placed on Catalyst in 2016 were observed in the banking sector (Getin Noble Bank – PLN 2.46 billion, PKO BP – PLN 3.78 billion, and mBank – PLN 1.25 billion) as well as in the energy and resources sectors (Orlen Group – PLN 5.27 billion, PGNiG – PLN 2.50 billion, Tauron – PLN 1.75 billion, Enea and Energa PLN 1 billion each). 

The Catalyst market remains the strongest and most influential corporate bond regulated market in CEE – twice as big as the Czech market, over four times larger than the Hungarian market, and almost four times larger than the Slovak market.

The numbers presented above show the significant and steady growth of only the Catalyst market itself. The market of unlisted corporate bonds is more difficult to calculate. Nevertheless, one thing is for certain: Development can be observed across the entire corporate bond market, both in terms of value and the growing share of bond debt across the entire debt market structure. As presented by the Michael/Strom brokerage house, back in 2009 the companies had PLN 222 billion of bank debt compared to only PLN 12.2 billion of bond debt. In 2012, the proportion was PLN 272 billion to PLN 31.4 billion. In 2014, the proportion changed to PLN 301 billion of bank debt and PLN 52.7 billion of corporate bond obligations. Summing up, the annual average dynamics of bank debt growth was only 6.3%, while the annual average dynamics of the corporate bond market reached 34%.

Our professional experience confirms the above trends, especially when it comes to the growing number and value of specialized corporate bond funds which offer tailor-made financing. Over the last year our office has assisted with over a hundred bond issues, a significant number of which involved private debt financing where the whole series was taken up by one or two specialized funds.

Such corporate bond/mezzanine funds have become an important alternative to bank debt, as, in exchange for a higher interest rate they can offer lower expectations as to security for the deal, a more flexible approach to the terms and conditions, and faster processing of the project.  Funds are often able to finance projects which failed to meet the expectations of banks.

We are optimistic about prospects on the market. We observe a growing need for legal assistance in respect of bond issues, both regarding public and private offers to be placed on Catalyst as well as private tailor-made financing offered by corporate bond funds.  With the growing bond market, we have been noticing increasing competitiveness on the corresponding legal market and higher client expectations – both positive factors that continue to improve market standards.

By Piotr Smoluch, Managing Partner, and Jakub Salwa, Partner, act BSWW

This Article was originally published in Issue 4.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Polish tax authorities have once again changed their view on the VAT classification of specific activities. This time, the shift in opinion concerns real estate deals. Until quite recently, tax authorities agreed that in general the sale of a commercial building constituted a supply of goods and thus was subject to VAT.

However, there appears to be a trend towards classifying such transactions as sales of enterprises – which are not subject to VAT due to simultaneous transfer of lease agreements by operation of law, security deposits, house rules, and the rights to building designs. In addition, the authorities attempt to challenge the classification of transactions already in place, in spite of relevant tax rulings, by picking on minor discrepancies between the description of a future transaction and the transaction as it actually happened (a strategy often also employed where the refund of input VAT has already been revised by the tax authorities).  

This change of classification will primarily affect the buyer, who will not be entitled to deduct input VAT and, if VAT has already been refunded, will be obligated to return it with default interest. Moreover, in some cases, buyers may also be required to pay a VAT penalty (additional VAT liability). In addition, the buyer will also be bound to pay a tax on civil law transactions, charged on the market value of individual assets comprising the enterprise (up to 2%), plus default interest. Significantly, should the buyer fail to obtain a certificate which would release it from liability for the debts of the seller related to the enterprise in due time before the transaction, the buyer may be found jointly and severally liable for tax arrears related to the running of an enterprise by the seller.

In general, a change of classification of a transaction on the buyer’s part should ideally be followed by a corresponding reclassification on the seller’s part. This would mean that the seller would have the right to reclaim VAT unduly paid. In practice, however, the tax authorities may disagree with the new classification and refuse to return overpaid VAT. 

However, recent administrative court holdings show that each transaction should be examined individually and that it should not be assumed a priori that each disposal of buildings along with lease agreements represents a disposal of an enterprise.

A sale of shares in a real estate company may be used as an alternative to an asset deal. Choosing this option, however, also involves tax-related risks. First of all, it should be determined if the seller is acting as a VAT payer. If yes, in the event of a sale of 100% of shares, one may argue that the deal is, in the economic sense, a disposal of an enterprise, and therefore that it should fall outside the scope of VAT. There are, however, more problems to be dealt with. Another issue is the exemption from VAT in the event of a disposal of shares in a real estate company. Under the provisions of the Polish VAT Act, VAT exemption is excluded for disposals of company shares carrying, among others, the title to real property. Also, as exclusion of VAT exemption was incorrectly implemented in the Polish system, taxpayers may rely directly on the provisions of EU VAT Directive 2006/112/EC. However, it should be noted that in reality in may be more favorable for the parties to the transaction if the disposal of shares is VAT-able given that the buyer could have the right to deduct input VAT and at the same time would not be obligated to pay the tax on civil law transactions.

Summing up, considering the uncertainly on the real estate market about the classification of a sale of commercial buildings, it is extremely important to carefully analyze the subject matter of the transaction, ensure that the parties to the transaction are protected in the event of reclassification of the transaction by making additional arrangements, and consider what transaction structure will be best in a given situation. 

By Malgorzata Wasowska, Head of Tax Practice, and Sergiusz Felbur, Associate, act BSWW

This Article was originally published in Issue 4.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.