In our article entitled Taxation of transformations, and preferential transformations we touched in general upon the tax issues arising during the transformation of companies. Now we will discuss the practical aspects.
When transforming a company, if we consider whether the transformation meets the conditions for a preferential transformation there are several other steps that need to be taken to claim tax allowances, or as a consequence of those.
What should you look out for when choosing a preferential transformation?
If we want to claim the tax allowance available during this process, we have to look at the general and special conditions of Act LXXXI of 1996 on Corporate Tax and Dividend Tax (hereinafter referred to: “Corporate Tax Act”). If there is nothing preventing us from choosing a preferential transformation, the following steps should be taken.
The special rules of the Corporate Tax Act on adjusting the tax base prescribe two important rules for legal successors if a preferential transformation is selected. Firstly, the legal successor’s articles of association must contain a commitment to assess its tax base following the transformation as if the transformation had not taken place, and to keep the revalued assets and liabilities separate. Secondly, the legal predecessor (or in the event of a demerger, the legal successor) must notify the tax authority of the decision in its tax return on the fiscal year of the transformation.
Which tax type do we want exemption for?
It is important to consider the burdens that individual tax types will represent during the transformation. We have to deal with the following issues here:
- During the transformation, does the company have property and/or movables subject to a duty payment?
- Do we want to measure our assets and liabilities at market value during the transformation?
Based on the responses to these questions we have to differentiate between cases where we would like to claim the tax benefits available during a preferential transformation for corporate tax as well, or where the goal is only to claim the duty exemption that arises during the transformation.
In our earlier article we highlighted that it is enough to meet the general conditions for preferential transformations in order to obtain the duty exemption; the special rules on tax base adjustments in the Corporate Tax Act do not have to be complied with.
Thus in reality, if the legal predecessor (or in the event of a demerger, the legal successor) notifies the tax authority of the decision in its tax return on the fiscal year of the transformation, then depending on whether the articles of association contain the aforementioned commitment it will have both a corporate tax allowance and a duty exemption, or, if the commitment is not included, it can only claim the duty exemption. Below we look at the significance of this in respect of items adjusting the legal successor’s future corporate tax base.
What basic scenarios can arise for future tax base adjustment items as a result of the transformations?
Depending on which tax type(s) we would like to claim the allowances for during a preferential transformation, the following cases may arise:
- non-preferential transformation at carrying value,
- non-preferential transformation at market value,
- market valuation during preferential transformation,
- preferential transformation at carrying value with commitment,
- preferential transformation at carrying value without commitment.
Since the change is most visible in the case of tangible assets, through this group of assets we will present the effects of the assets taken over at the legal successor.
1. If the non-preferential transformation takes place at carrying value, the change compared to the former status is that the write-down of the asset re-starts, with the difference that the net value as of the transformation will be the asset’s new gross value, similar to an asset purchase.
2. If it is a non-preferential transformation, and the transforming party applies a market valuation method, the revaluation difference i.e. the difference between the new gross value and the carrying value as per the tax law, will be taxable during the transformation. In this case, the accounting and tax depreciation of the asset will start on the new, changed gross (market) value.
3. In the case of a preferential transformation and valuation at market value, the revaluation difference will not be taxable during the transformation but the tax depreciation of the tangible asset will be completely different from the accounting depreciation in terms of both the gross value and the remaining useful life of the asset, because we committed to defining the tax base after the transformation as if the transformation had not taken place. We calculate accounting depreciation based on the changed gross value, and calculate it with the full re-started useful life of the asset, while in the case of tax depreciation, the useful life applied at the legal predecessor must be continued.
4. If the transforming party does not opt for a market valuation but fulfils the commitment, the carrying value as of the transformation will be the new accounting gross value, while the tax depreciation has to be continued based on the legal predecessor’s records. The accounting depreciation clearly changes here too since the net value as of the transformation will be the asset’s new gross value.
5. In this last case, when the transforming party chooses a preferential transformation at carrying value without a commitment, it can only claim duty exemption. Here, we have to follow the first point, which means the depreciation of the asset received will restart at the legal successor under both accounting and tax law.
Based on the above, the adjustment items for the future corporate tax base of the legal successor can vary widely depending on the choices made.
