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Debt-for-equity swap via contribution in kind

Frequently, companies that hold receivables under loans they have granted to subsidiaries decide to convert them into shares. In such situations taxpayers may be uncertain whether this contribution to the company against new shares constitutes a contribution in cash or in kind.

The answer to this question also gives rise to certain consequences during a subsequent disposal of the shares. In a recent case resolved by the Supreme Administrative Court, a company requested an individual ruling on what amount should be recognized as tax-deductible costs in the event of a sale of shares that had been assumed through a conversion of debt. According to the taxpayer, the case involved a cash contribution, and this should mean that the expenditures incurred in acquiring the shares were deductible costs.

The tax authority was of a different opinion and held that the conversion of debt into shares in a company must be treated as a contribution in kind, because a cash contribution may only involve cash or a bank transfer to the company’s account.

Also, in a judgment of 25 March 2015 (Case II FSK 349/13), the Supreme Administrative Court ruled against the taxpayer, holding that a conversion of debt into shares in the debtor company will always constitute a non-cash contribution. As a result, in the event of subsequent disposal of the shares, the taxpayer would be entitled to recognize the costs of their acquisition at the level of their nominal value, but not the expenditures actually incurred in their acquisition.

This is yet another unfavourable ruling of the Supreme Administrative Court in the space of just a few months.

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