Precedential decision in small anti-avoidance clause case

DZP's Tax Practice in cooperation with the law firm WPW Wołczek, Proksa & Wspólnicy from Wrocław successfully represented the client in the precedential dispute before the tax authorities concerning the application of the so-called small anti-avoidance clause to company mergers (the amount of corporate income tax arrears together with interest on the arrears was nearly PLN 8 million).

The first instance tax authority challenged the tax neutrality of the company merger and set income for the acquiring company of the value of the target company’s assets, as it found that the merger was the final element of a sequence of events aimed at gaining a tax advantage and was not economically justified. Therefore, according to the tax authority, the provisions excluding the tax neutrality of mergers (the so-called small anti-avoidance clause) applied and the merger resulted in income arising for the acquiring company.

As a result of an appeal against the first instance authority decision prepared by experts from DZP's Tax Practice in cooperation with the law firm WPW Wołczek, Proksa & Wspólnicy, the head of the customs and tax office overturned the decision issued by the same authority at first instance and discontinued the proceedings. The decision ends the dispute with the tax administration authorities and means that the tax authorities have to return arrears paid with interest.

This decision is extremely important not only for the client, but also for other taxpayers because of its precedential nature, as although these provisions have been in force for more than 17 years, they have been applied extremely rarely in practice and there is no practice of assessing legitimate economic reasons and activity whose main objective is either to avoid or evade taxation.

When repealing the decision delivered at first instance, the tax authority upheld the arguments raised in the appeal by experts from DPZ’s Tax Practice and WPW Wołczek, Proksa & Wspólnicy and issued a number of guidelines on the application of the small anti-avoidance clause (SAAR), inter alia:

• SAAR apply if a direct result of a merger is a tax advantage;
• if the tax advantage is independent of the merger (it would also have arisen if the merger had not been carried out), it cannot be claimed that the main or one of the main objectives of the merger is to avoid or evade taxation and therefore there are no grounds for the application of SAAR;
• in the legal order until 2016, in order to apply SAAR two conditions had to be met: no economic justification and acting in order to gain a tax advantage;
• tax neutrality of the merger itself is not a tax advantage gained through the merger.

These guidelines show the direction in which tax authority practice may go as regards SAAR application and challenging the tax neutrality of mergers and divisions of companies both in the previous legal order (which concerns most of the proceedings currently pending) and the current one, as from 2017 onwards, in order to apply SAAR, it is enough for there to be no economic justification for the merger and division (presumption of acting in order to avoid or evade tax), which underlines the importance of the reasons behind the restructuring processes carried out for their tax consequences.

This case is also precedential in procedural terms. When examining the case as second instance authority, the head of the customs and tax office overturned his decision delivered at first instance due to his earlier incorrect legal assessment. It is therefore one of a very few decisions at national level where the head of the customs and tax office has overturned his own decisions.

The case was conducted at DZP by Artur Nowak, Co-Managing Partner, and Tomasz Leszczewski, Senior Tax Manager, in the Tax Practice.