Judgment summary
This is a request for a preliminary ruling from the Naczelny Sąd Administracyjny (Supreme Administrative Court, Poland) concerning the interpretation of Article 9 of Council Directive 2008/7/EC concerning indirect taxes on the raising of capital (1).
The dispute arose between A. sp. z o.o., a company governed by Polish law, and the Dyrektor Izby Administracji Skarbowej w Zielonej Górze, concerning the levying of Polish tax on civil-law transactions (PCC) on the conversion of a limited partnership (spółka komandytowa) into a general partnership (spółka jawna) (2).
The Court held that the exercise by a Member State of the option under Article 9 of Directive 2008/7 does not allow that Member State to levy an indirect tax on the conversion, not accompanied by a contribution of capital, of an entity operating for profit not referred to in Article 2(1) of the Directive into another such entity. Such a conversion must not be subject to any form of indirect tax whatsoever under Article 5(1)(d)(i), read with Article 2(2), subject to the duties and taxes referred to in Article 6 of the Directive (41).
Background
On 9 July 2021, an entity governed by Polish law, whose legal form was changed from a limited partnership to a general partnership, applied to the tax authority for a refund of overpaid tax on civil-law transactions allegedly resulting from that conversion. The entity argued the conversion had been wrongly subjected to that tax, as there was no 'increase in the assets of the partnership' within the meaning of Article 1(3)(3) of the PCC Law (17).
By decision of 18 March 2022, the tax authority rejected the application, considering that the amendment to the foundational document had led to an increase in assets (18).
The entity's action before the Wojewódzki Sąd Administracyjny w Gorzowie Wielkopolskim was dismissed by judgment of 7 July 2022, which upheld the tax authority's assessment (19). The entity, which had by then become a limited liability company, appealed on a point of law to the Naczelny Sąd Administracyjny, the referring court (20).
The referring court noted that, according to the notarial deed, the contributions to the general partnership resulting from the conversion were set at the same amount as the contributions previously made to the limited partnership, and the partners made no further contributions in cash or kind on the date of conversion (21). It considered that Directive 2008/7 might require Poland not to subject such a conversion to any indirect tax under Article 5(1)(d)(i) of the Directive, but was uncertain whether Poland's exercise of the option in Article 9 of the Directive, allowing Member States not to regard entities operating for profit under Article 2(2) as capital companies, permitted it nonetheless to tax the conversion (23, 24).
Core dispute
The referring court asked whether Article 9 of Directive 2008/7, which allows a Member State to choose not to recognise entities operating for profit referred to in Article 2(2) of the Directive, such as general partnerships, as capital companies, must be interpreted to mean that the Member State is also free to choose whether or not to levy capital duty on such entities (25).
The Court reformulated the question as asking whether Article 9 allows a Member State to levy an indirect tax on the conversion of an entity operating for profit not referred to in Article 2(1) of the Directive into another such entity, also not referred to in that provision (29).
The reference proceeded on the premisses that Poland had exercised the option under Article 9, and that both the limited partnership and the general partnership concerned operated for profit; verification of these premisses was left to the referring court (27, 28).
Court findings
The Court recalled that Directive 2008/7 provides for complete harmonisation of the cases in which Member States may levy indirect taxes on the raising of capital, intended to eliminate factors distorting competition or hindering the free movement of capital (30).
Under Article 2(2), any company, firm, association or legal person operating for profit not covered by Article 2(1) is deemed to be a 'capital company', to prevent choice of legal form from resulting in different fiscal treatment of economically equivalent transactions (32).
The levying of capital duty on contributions of capital to capital companies is, subject to Article 6, prohibited by Article 5(1)(a), with an exception under Article 7(1) for Member States that levied capital duty on 1 January 2006, subject to compliance with Articles 8 to 14 (33). Given its detrimental economic effects, the levying of capital duty under Article 7(1) is strictly circumscribed, whereas the prohibition on indirect taxation under Article 5 must be interpreted broadly (34).
Article 9 is one of the provisions circumscribing how a Member State within Article 7(1) may continue to levy capital duty; it allows such a Member State to treat entities operating for profit under Article 2(2) as not covered by 'capital company' for the purposes of levying capital duty (35).
Given the wording of Article 9 ('for the purposes of levying capital duty'), its place in Chapter III (devoted exclusively to the levying of capital duty), and the purpose of strictly framing such levying, the derogation in Article 9 cannot be interpreted as allowing Member States to derogate from Article 2(2) in respect of indirect taxes other than capital duty (36). Article 9 therefore has no effect on rules of the Directive unrelated to capital duty (37).
A conversion not accompanied by a contribution of capital, between two entities operating for profit not referred to in Article 2(1), constitutes a 'conversion of a capital company into a different type of capital company' within Article 5(1)(d)(i), owing to the equivalence created by Article 2(2). In that situation, characterised by the absence of a contribution of capital and inapplicability of Chapter III, Article 9 does not empower Member States to refrain from treating the entities as equivalent (38).
It is for the referring court to determine whether the conversion at issue was accompanied by a contribution of capital within the meaning of Article 3 of the Directive; on the information available, it appeared, at first sight, that the conversion was not so accompanied and therefore fell within Article 5(1)(d)(i) (40).
Outcome
The Court ruled that Article 9 of Directive 2008/7 must be interpreted as meaning that the exercise by a Member State of the option provided for in that article does not allow that Member State to levy an indirect tax on the conversion, not accompanied by a contribution of capital, of an entity operating for profit not referred to in Article 2(1) of the Directive into another such entity also not referred to in that provision.
Such a conversion must not be subject to any form of indirect tax whatsoever, pursuant to Article 5(1)(d)(i) of the Directive, read in conjunction with Article 2(2) thereof, subject to the application of the duties and taxes referred to in Article 6 of the Directive (41).
As the proceedings were a step in the action pending before the referring court, the decision on costs was left to that court; costs incurred in submitting observations to the Court, other than those of the parties, were not recoverable (42).
Major issues / areas of contention
- Whether Article 9 of Directive 2008/7/EC allows a Member State to choose whether or not to levy capital duty on entities operating for profit deemed to be capital companies under Article 2(2)
- Whether Poland could levy tax on civil-law transactions on the conversion of a limited partnership into a general partnership
- The scope of the Article 9 derogation, limited to the levying of capital duty and not extending to other indirect taxes
- Whether the conversion at issue was accompanied by a 'contribution of capital' within the meaning of Article 3 of Directive 2008/7
- The interaction between Article 5(1)(d)(i), Article 2(2) and Article 9 of Directive 2008/7 in determining the prohibition on indirect taxation of conversions between capital companies