From January 1, 2019 the tax deductible costs with respect to revenues from taking up shares in a company against a non-cash contribution in the form of a loan previously granted by a shareholder or other shareholder’s own receivables will be the amount of such loan or receivables, on terms specified in the Income Tax Acts.

The tax consequences of converting the shareholder’s receivables into the share capital of the company have been controversial for a long time. Initially, it was assumed that the acquisition of the company’s shares in exchange for a cash contribution and then covering this contribution by set-off of the receivables of the shareholder toward the company is tax-neutral. At present, there is an unfavorable interpretation for taxpayers, according to which the set-off of receivables is a non-cash contribution within the meaning of the Income Tax Act, and thus the shareholder incurs taxable income in the amount of the receivable. Additionally, by the end of 2018, some tax authorities refused to allow the shareholder the right to include the value of the shareholder’s own receivables in the tax deductible costs, for example, based on loans granted to the company or supplies and services rendered to it. This meant that the in-kind contribution in the form of such claims was very tax-unfavorable.

According to the new provisions, if a loan granted by a shareholder to a company’s share capital is converted, the tax deductible costs will be the amount corresponding to the amount of such loan (facility), however, not higher than the value of the respective income. Nevertheless, in case of contribution of other own receivables, their value will be the tax deductible cost, but only in the part previously credited to the due revenues of the entity making the contribution.

⇒ Potential problems in case of the in kind-contribution in the form of the shareholder’s loans

It should be noted that the prerequisite for including in the tax deductible costs of the value of loans converted into equity is the prior transfer of the loan amount to the company’s payment account by the shareholder making the contribution. It seems that the purpose of the legislator was to allow only the principal amount of the loan to be included in the tax deductible costs, excluding accrued but unpaid interest. The provision, however, was formulated too narrowly. It prevents the inclusion in the tax deductible costs of:

• the principal amount of the loan – if it was transferred to the account of another entity, e.g., in the performance of a transfer in order to repay the company’s liabilities toward a third party or when the loan receivable was created through the conversion of another liability,
• the value of capitalized interest on the loan – they are not included in the due revenues of the lender and are taxable revenues at the time of their capitalization.