An important judgment of the Supreme Administrative Court: no exit tax on donations

On 14 January 2022, the Supreme Administrative Court issued an important judgment regarding the taxation of income from unrealized profits (the so-called exit tax). Family succession can become less costly.

Introduction of the tax on income from unrealized profits (the so-called exit tax) in 2019 raised a lot of controversy and the unclear wording of some provisions required clarification. After two years, we finally have a very clear position of the Supreme Administrative Court (case ref. No. II FSK 12/21) on the exit tax applicable to donations made of personal assets.

It ought to be explained that the problem related to the transfer of shares in a capital company by way of a donation to a person other than a Polish tax resident, which had to be subject to exit tax. Director of the National Tax Information (KIS) was of the opinion that the unpaid transfer of assets located in the territory of the Republic of Poland to another entity, as a result of which Poland would lose the right to tax income from the sale of such asset, will be subject to exit tax (cf. e.g. individual interpretation 0115-KDIT3.4011.228.2020.1.KR). This in fact closed the way to a tax-free donation of any assets located in Poland to a non-Polish tax resident.

However, the Supreme Administrative Court (NSA) considered such positions as incorrect. In the cited judgment of the Supreme Administrative Court, dismissing the complaint of the Director of KIS, the Court stated, inter alia, as follows:

1. According to the EU law, the tax on income from unrealized profits should, as a rule, apply only to legal persons, and individual countries may keep their tax autonomy in terms of introducing under condition that the freedoms provided by the EU treaties are respected, i.e. in particular the principle of the free movement of capital and the principle of free movement. Therefore, only the transfer of assets that is related to running a business activity can be taxed. Shares or stocks in a company do not constitute such assets.
2. Personal assets of a Polish taxpayer may be taxed with exit tax only when the taxpayer's tax residence changes, not when the assets are transferred free of charge.

Any questions? Feel free to contact our expert: tomasz.krzywanski@gww.pl