Income from the sale of shares and ownership interests in limited companies is the difference between the revenue obtained from the sale and the costs incurred in acquiring or subscribing to them. In the CIT Act, however, there is no unambiguous regulation laying out how to determine such a cost in relation to ownership interests which were acquired or taken up at different times, in various transactions and at various prices. Given that the CIT Act does not address the manner of determining the cost of a sale of shares and ownership interests acquired at different prices, doubts often arise in companies as to whether it is more justifiable to apply – by way of analogy – the regulation of the PIT Act, or accounting principles.
The rules of the PIT Act are clear
Payers of personal income tax may in such cases apply Article 30b par. 7 read together with Article 30a par. 3 of the PIT Act, pursuant to which, in order to recognise costs of obtaining revenue, the FIFO method is applied; it assumes that ownership interests are sold in order, beginning from those acquired first by the taxpayer. Those provisions, however, do not regulate how to determine the income of limited companies, and so they cannot be directly applied by CIT taxpayers. This position has been confirmed by the tax authorities, including the Tax Chamber in Poznan, in an interpretation of 13 November 2009 (ILPB3/423-665/09-2/ŁM). This ruling was issued in the case of a company disposing of shares acquired on the WSE at various prices. For accounting purposes, the company determined the costs of acquiring the shares at an average weighted amount, and for tax purposes wanted to use the FIFO method. The facts of the case did not give the company an objective possibility of determining the purchase prices of the shares sold, since in the meantime they had been assimilated, and shares of a new issue had been joined together with the basic issue. The Tax Chamber in Poznań held that, where there is no possibility of determining the cost, the company should give priority to the rules contained in the CIT Act and the secondary legislation to that act, including in particular Article 9 par. 1 of the CIT Act concerning the keeping of records.
In the records
From an accounting perspective, in the case where a purchase prices or the costs of generating identical or similar asset components are different, those expenditures may be evaluated on the basis of Article 34 par. 4 of the Accounting Act (hereinafter the “AA”), according to one of four evaluation methods.
Assuming that the sale price of shares or ownership interests does not change, the result generated from individual sale transactions will differ depending on the method used. Yet, the AA leaves the selection of the evaluation method at a business’s discretion, provided that there is a reliable and clear presentation of the financial and asset condition of the entity and its financial result, and provided that the methods are applied consistently. In the end, the sum of costs disclosed will be equal to those actually incurred, and the total income of the taxpayer will be the same, no matter what method was applied before.
It is not always possible to apply accounting principles for the purpose of calculating the amount of taxable income. This is mainly because accounting records should be directly subordinated to tax needs, and not the other way round. This is determined by Article 9 par. 1 of the CIT Act, pursuant to which taxpayers are obliged to keep accounting records, in accordance with separate provisions, in a manner which ensures that the amount of income (loss), tax base and amount of tax due for the taxation year can be determined. When determining the amount of the costs of earning revenue from a sale of shares and ownership interests, it is first necessary to refer to the tax regulations.
Basic regulation
The primary regulation concerning the determination of costs of earning revenue is Article 15 par. 1 of the CIT Act, pursuant to which costs are outlays incurred in order to earn revenue or to maintain or secure sources of revenue. Article 16 par. 8 of the CIT Act refers in turn to the moment such costs are recognised, and states that outlays for acquiring (taking up) ownership interests in limited companies and securities constitute costs of earning revenue only when the ownership interests or securities are sold.
The tax authority has established an order
In practice, it results from the above provisions that, when determining the costs of selling shares or ownership interests, a company must be guided first of all by the rule of directly assigning costs to revenue obtained, while the other methods are applied only when such a direct assignment is not possible. The priority of this principle is confirmed in an interpretation of the Tax Chamber in Łódź of 24 September 2013 (IPTPB3/423-256/13-2/MF) and elsewhere. The authority was responding to a query by a domestic company planning to dispose of some of its interests in a Cypriot company. The applicant had acquired these in various forms at various times, but all of the interests were identified and had costs of acquisition ascribed to them. It was therefore possible to precisely determine which of them had been sold. The Tax Chamber stated categorically that if an entity “is able to connect each interest sold with a historical costs of its acquisition, all considerations on applying the FIFO method or another method not specified in the CIT Act for the purpose of recognising the costs of obtaining revenue from the paid disposal of the interests in the Cypriot company are unnecessary and groundless”.
Such an unequivocal stance also find confirmation in the interpretation of the Tax Chamber in Poznań of 13 November 2009 (ILPB3/423-665/09-2/ŁM). In that ruling we read: “Where it is possible to directly ascribe costs to revenue obtained from the sale of specific shares, the company should apply the rules referred to above from the provisions of the Corporate Income Tax Act. (...) when applying other methods to determine the amount of income, the company should give priority to the rules contained in the Corporate Income Tax Act and the secondary legislation to that act”.
Note! The method of direct assignment can (and should) be applied within the scope within which it is possible to directly ascribe costs incurred to revenue earned. This is possible in the case of a sale of shares in a joint-stock company. Such shares are dematerialised and numbered, and so it is possible to identify the purchase price of individual securities.
Particular circumstances
The method of direct assignment, however, need not be applied to ownership interests in limited liability companies or, in particular circumstances, to shares, e.g. when shares purchases are assimilated, as a result of which shares of a new issue are joined together with a basic issue. In the view of the tax authorities, in such a case the method foreseen in the Accounting Act (compare the interpretation of the Tax Chamber in Poznań of 13 November 2009, ILPB3/423-665/09-2/Ł) should be used. From an interpretation of the Tax Chamber in Warsaw of 5 May 2011 (IPPB3/423-164/11-2/AG) it results that if an applicant has no objective possibility of stating which investments from a pool of identical interests or securities are the subject of a specific paid sale (in-kind contribution), “it may determine the cots of earning revenue (...) by applying one of the methods specified in Article 34 par. 4 pt. 1-3 of the Accounting Act (average weighted, FIFO or LIFO method). It is a condition here that such a method be applied invariably throughout the tax year”.
CONCLUSION
A limited company which cannot identify ownership interests sold in a given transaction, and which therefore cannot determine the actual cost of acquiring or taking them up, may for tax purposes apply an accounting method – FIFO, LIFO or average weighted. Those methods cannot be applied when it is possible to precisely determine the costs of acquiring the interests and which of them were sold.
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