What makes a spin-off by way of separation different from the other ways of division regulated by the CCC and what makes it particularly attractive is the possibility for the divided company to acquire shares in the acquiring (newly established) company.

Prior to the entry into force of the amendment in question, under the available methods of division, there was only the possibility of division of a company resulting in the acquisition of shares by the shareholders of the divided company, not by the divided company itself.

As a result of a demerger, the company being demerged may become a “mother company” (vertical relationship) rather than a “sister company” (horizontal relationship) to the acquiring (newly incorporated) company.

In other words, as a result of the spin-off, the company being divided will become a shareholder of the company to which it has contributed its assets.

Previously, similar effects in terms of group formation could also be achieved by making an in-kind contribution in the form of an organised part of an enterprise in order to acquire shares in the increased share capital of a company (“OCP“).

In this article, we adopt a comparative perspective and confront the acquisition of units in commercial law companies in connection with the contribution in kind (in-kind contribution) of the OCP to the company with a demerger by spin-off.

APORT OF AN ORGANISED PART OF THE ENTERPRISE TO

A COMPANY An organised part of an enterprise as having in-kind capacity may be the subject of a non-cash contribution (in-kind contribution) to a company in connection with the acquisition by a shareholder of shares in the increased share capital.

In the practice of Polish companies, in-kind contribution transactions are sometimes the only justified option, allowing the realisation of the needs of entrepreneurs related to the adjustment of the structure to the risk incurred, the division of the area of activity, or the realisation or increase of the chances of obtaining external financing.

When are we talking about IPP?

In general, an enterprise is understood as a set of tangible and intangible assets, including liabilities, which are in mutual relations and have the capacity to function independently in business.

Thus, in order to speak of an enterprise, the following conditions must be met:

• the existence of a group of tangible and intangible components, including liabilities;
• organisational and financial separation of the group of tangible
• and
• intangible
• components; dedication
• of the group of tangible
• and
• intangible components to
• the performance of specific economic tasks;
• the ability of the group of tangible and intangible components to function as an independent enterprise independently performing these economic tasks[1].

For a group of tangible and intangible components to be considered an enterprise, it should be distinguished on three levels, i.e. organisational, financial and functional.

It is only by being independent in these three areas that it is possible to independently perform the tasks for which the company exists.

Thus, the contribution of a group of tangible and intangible assets as a contribution-in-kind to a company may be treated as a contribution of IPC, provided that the extent of the transferred assets, rights and liabilities makes it possible to conclude that the conditions for the classification of the group as IPC have been met.

It goes without saying, however, that the exclusion of certain assets from a separate group does not mean that there has been no contribution in kind of IPC.

Indeed, if the minimum of goods, means and ways that are required to carry out business activities within this enterprise have been contributed, then a contribution of IPP has taken place[2].

• Risks of reclassification of IPP

Despite the numerous advantages of in-kind transactions, particular attention must be paid to the risks associated with the classification of a set of tangible and intangible assets as IPP.

The unambiguous classification of a given set of tangible and intangible assets as a company or IPP is a fundamental issue that requires careful analysis in each case.

Thus, the procedure for making a contribution-in-kind to a company is a multi-stage one and requires a number of steps to be taken.

The adoption of an erroneous qualification has significant consequences under:

1. 1. civil law provisions;
   2. tax law provisions

.

Re. i.

Consequences of reclassification of OCP under civil law

Under the applicable rules, the subject of an OCP disposal transaction is everything that is part of the OCP.

In Polish law there is a presumption that the assets are deemed to be an organised whole for the purpose of conducting business activities, unless the content of the legal transaction itself or specific provisions indicate otherwise.

This means that the content of the legal transaction does not have to explicitly indicate which exact assets are the subject of the transaction, as it is the ZCP as a whole.

Consequently, in the event that the object of the transaction is not the IPP in the sense of Article ⁵⁵¹ of the Civil Code, but only individual assets, it should be clear from the content of the legal transaction what constitutes the object of such transaction, as in such a case the presumption that the legal transaction includes everything that is part of the enterprise cannot be used[3].

Re. ii.

Consequences of the reclassification of IPP under tax law

On the other hand, the incorrect classification of tangible and intangible assets under tax law may have far-reaching financial consequences, which is why the correct assessment of a set of assets is such an important pre-transaction step.

Incorrect classification may have consequences in particular with

1. regard to corporate income tax, as in principle the in-kind contribution of property, plant and equipment should be CIT-neutral, and therefore reclassification of a given set of tangible and intangible assets and recognition that it does not constitute property, plant and equipment may lead to tax arrears with regard to corporate income tax; value added
2. tax, as in the event of treating a given set of tangible and intangible assets as property, the provisions of the Value Added Tax Act of 11 March 2004 do not apply to the transaction (Dz.

1. U. 2004 No. 54 item 535), and therefore, in the event of reclassification and recognition that a given collection is not, however, TCP, a VAT arrears will be established.

1. • Effects of classification as IPP

An important issue related to the in-kind contribution of IPP to a company is the question of the transfer of liabilities related to its operation and arising up to the date of disposal of IPP.

It should be noted that the classification of a given set of tangible and intangible assets and the related liabilities as a TCP has legal effects in the following areas:

1. with respect to liability for obligations related to the operation of the TCP, as the purchaser of the TCP is jointly and severally liable with the seller for its obligations, unless at the time of acquisition he was not aware of these obligations, despite the exercise of due diligence; with respect to
2. tax legislation.

Re. i.

Joint and several liability vs. assumption of liabilities

The purchaser and the seller of the OCP remain jointly and severally liable for the liabilities relating to the operation of the OCP.

This means that the purchaser of the OCP, as it were, accedes to the debt associated with and arising from the operation of the OCP arising up to the date of the transaction.

The issue of liabilities should be the subject of in-depth analysis by the parties to the transaction, as it is a source of potential financial risk.

In practice, purchasers in such a situation decide to carry out due-diligence to safeguard their interests and the results of such due diligence are reflected in the transaction documentation.

Since the purchaser remains jointly and severally liable for the obligations of the vendor and this liability cannot be excluded or limited without the consent of the creditor, it is reasonable to address this issue as precisely as possible in the transaction documentation and to reflect the results of the due diligence and the identified risks in the price/quantity of the shares granted in exchange for the contribution in kind in the form of CSF.

In the event that the parties agree to transfer the liabilities associated with the TCP to the buyer, this will additionally require the consent of the seller’s creditor.

In this perspective, there is therefore a risk that the creditor’s consent will not be obtained, with the consequence that there will be no transitive change of debtor[4].

Without such consent, the assumption of obligations by the purchaser of the ZCP on the basis of the transaction documentation will therefore not result in a transfer of economic risk from the seller to the purchaser.

In the absence of the creditor’s consent, there will be no change in the liability relationship between the existing debtor and the creditor, whereas an obligation will arise between the existing debtor and the would-be transferee (purchaser of the OCP), pursuant to which the would-be transferee will become liable to the debtor for the creditor’s failure to demand performance from him[5].

In summary, in such a situation, it is primarily the transferor who will bear the economic risk of repayment of such liabilities, as in exchange for the disposal of the OCP he will receive the price / consideration less the value of the liabilities disposed of (agreed in the course of the transaction), invariably bearing the risk of insolvency of the purchaser of the OCP[6].

Re. b.

Classification of OCP

under tax law Recognition of a given set of tangible and intangible assets as OCP under tax law is connected with exemptions under tax law, primarily under CIT and VAT, and therefore the classification of a given part of an enterprise as OCP also under these laws remains a fundamental issue.

In order for a transfer of IPP to be deemed to have taken place for the purposes of tax law, it is of key importance that the obligations connected with the operation of the IPP have been transferred, which follows from the scope of the definition of IPP under the tax laws, which also require the transfer of the obligations connected with the operation of such IPP in order to classify the transferred assets and non-assets as IPP[7].

For the purposes of the tax laws, CPP is understood to mean an organisationally and financially separated set of tangible and intangible assets, including liabilities, within an existing enterprise, intended to perform specific economic tasks, which at the same time could constitute an independent enterprise performing these tasks independently[8].

Thus, in order for the disposal of tangible and intangible assets to constitute a disposal of IPP for tax purposes, it should also be accompanied by the assumption of liabilities associated with its operation[9].

It is generally accepted that liabilities are an element of IPCs because they remain linked to the separated set of components, which are intended to carry out specific economic activities and are therefore a consequence of the functioning of these elements as an organised whole.

Despite the fact that, under the tax legislation, IPP also includes the associated liabilities, it is not legally possible to make an in-kind contribution of IPP together with the liabilities in a single legal transaction.

As already indicated above, the consent of the creditor is required for an effective transfer of liabilities and assumption of debt.

Contribution in kind of ZCP to a company involves additional steps, the effectiveness of which depends on the actions of third parties.

Thus, the separation of certain asset masses may not be possible.

Another equally important risk in making a contribution-in-kind of IPP to a company is the risk that the share capital increase will not come to fruition.

Making a contribution-in-kind to a company involves the conclusion of agreements leading to the transfer of legal title to the IPP, while the actual completion of a share capital increase generally requires an amendment to the articles of association and an entry in the National Court Register.

The period between the conclusion of the agreements and the entry of the share capital increase in the National Court Register is therefore a period in which the seller of the IPP no longer holds the IPP and, at the same time, does not yet hold shares in the company to which the IPP was contributed.

The risk in this area can be minimised in the transaction documentation, but nevertheless represents a real threat to the interests of the seller.

However, such a risk does not arise in the case of a division by spin-off, as the transfer of rights to the assets takes place as soon as the division is registered in the National Court Register.

A division by spin-off may therefore prove to be an attractive alternative to making a contribution-in-kind in the form of CSP, which consists in separating a part of the assets of the company being divided into a target company (existing or newly established) in exchange for shares in that company.

The procedure of division, which is a procedure conducted before the registry court, thus involves only the company being divided and the one to which the assets are spun off, and not the shareholders of these companies, as is the case with other division procedures.

As a result, a vertical structure is created in which the demerging company becomes a shareholder of the company to which its assets have been hived off.

Although the object of division by spin-off may even be a single asset, given the assumption of tax neutrality and the attractiveness of the introduced mechanism from the point of view of the succession principle, it should be assumed that in practice the most common procedure will be the division of companies by spin-off of IPPs.

The procedure of demerger itself is not significantly different from the other modes of demerger.

The main difference is that it is the company being divided that is the shareholder of the company to which the assets of the company being divided are hived off, and not its shareholders.

An unquestionable advantage of the division by spin-off, which increases the attractiveness of this solution in the context of a contribution-in-kind, is the partial universal succession, which does not occur when assets are contributed to the company as a contribution in kind.

Partial universal succession means that:

• the acquiring company or the newly established company established in connection with the division shall, as of the date of the spin-off, assume the rights and obligations of the company being divided, as specified in the plan of division;
• the acquiring company or the newly established company established in connection with the division shall, as of the date of the spin-off, in particular, pass the permits, concessions and reliefs remaining in connection with the assets of the company being divided assigned to it in the plan of division and which were granted to the company being divided, unless the law or the decision granting the permit, concession or relief provides otherwise.

Thus, when separating the OCP as part of a demerger by spin-off, it is not, as a rule, required to obtain the consent of third parties to transfer obligations under concluded contracts or to conclude additional annexes.

In addition, the subject of succession are permits, concessions and allowances, with the proviso, however, that in this case the act or the decision on granting the permit, concession or allowance may provide for exclusion of its transferability or introduction of additional obligations related to their transfer.

The above feature constitutes one of the main advantages of demerger by separation in the context of hitherto conducted contribution transactions.

This is because it is an attractive alternative, due to the fact that, as a result of such a division, the company to which the assets of the company being divided are transferred will assume the debt without the need to undertake additional actions involving third parties.

As a result of the above, the element of dependence of the success of the transaction on obtaining third-party consents falls away, which strengthens the feeling of certainty of the transaction.

Division by spin-off may additionally prove to be an attractive way of reorganising companies due to the legislator’s intention to make the division subject to the principle of tax neutrality, provided that certain conditions are met, including the status of the spin-off and the assets remaining in the divided company as IPP, as well as the market nature of the transaction.

DIVISION BY SEPARATION AS AN ALTERNATIVE FOR APORT

Prior to the entry into force of the provisions regulating division by spin-off, certain modifications related to the companies’ activities required the shareholders to carry out transactions of an in-kind nature, which in turn implied the need to obtain additional approvals and entailed risks regarding the transfer of permits, concessions or concessions.

As of 15 September 2023, companies can achieve a similar effect by means of a demerger of the company by separation, with the demerger being covered, by analogy with other transformation processes, by the principle of partial universal succession.

Partial universal succession allows for the transfer of all rights and obligations relating to the spun-off IPP without the need for additional actions.

This principle also applies to granted permits, concessions or concessions, subject to those for which transferability is excluded.

The introduced procedure is undoubtedly an attractive instrument allowing for the reorganisation of corporate structures.

It may also be a way of financing the company without the need to expand the group of shareholders, which we will tell you about in the next publication

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[1] Judgment of the WSA in Krakow of 11 February 2015, ref. no. I SA/Kr 1115/14

[2] Judgment of the Supreme Court of 8 April 2003, ref. no. IV CKN 51/01

[3] Judgment of the Supreme Court of 20 July 2017, ref. no. IV CSK 563/19

[4] K. Zagrobelny [in:] E.

Gniewek, P. Machnikowski (eds.) Kodeks Cywilny.

Commentary.

Art. 521, ed., Warsaw 2023, edition 11, SiP Legalis.

[5] Art. 521 § 2 of the Act of 23 April 1964, Civil Code (Journal of Laws 1964 No. 16, item 93 as amended)

[6] A.

Nowacki, Limited liability company.

Volume I.

Commentary.

Art. 151 – 226 KSH, Art. 158 , Warsaw 2018, ed. 1, Nb 156, SiP Legalis.

[7] A.

Nowacki, Limited liability company.

Volume I.

Commentary.

Art. 151 – 226 KSH, Art. 158 , Warsaw 2018, ed. 1, Nb 158, SiP Legalis.

[8] Art. 4a(4) of the Corporate Income Tax Act of 15 February 1992 (Journal of Laws 1992 No. 21 item 86 as amended).

[9] A.

Nowacki, Limited liability company.

Volume I.

Commentary.

Art. 151 – 226 KSH, Art. 158 , Warsaw 2018, ed. 1, Nb 158, SiP Legalis.