THE MOMENT OF TAXATION OF PAID DISPOSAL OF SHARES OF A LIMITED LIABILITY COMPANY UNDER A SUSPENDED CONDITION

We were approached by a client with a legal question who signed a contract for the sale of shares in a limited liability company. The share transfer agreement was signed in 2023, and the transfer of ownership took place on that date. However, the fees for the sale of shares were divided into 4 tranches. Two of them were to be realized in 2024. One of the conditions for receiving the final payment (the 4th tranche) for the sale of shares, was the positive resolution of administrative and tax matters, the completion date of which was not known. So the question arose, when should the taxpayer tax the funds?

The regulations in this regard are unambiguous, since the moment of taxation of the disposal of shares for consideration is specified in Article 17(1)(6)(a) in conjunction with Art. 17(1ab)(1).

According to its wording, income from monetary capitals is considered to be, income from the paid disposal of shares, partnership interests and securities. Such defined income arises at the time of transfer of ownership of shares to the buyer. You can read more about this in an interpretation of the Director of the National Tax Information dated May 16, 2023, number dKtEU4_C, where he stated that “the circumstance of spreading the payment of the price of a paid disposal of shares into parts is not relevant. This is because the legislator does not make the moment at which income under Article 17.1.6(a) of the Act arises dependent on the manner of settling payments under the share sale agreement, but instead linked it to the moment at which the transferor transfers ownership of the shares to the purchaser, and thus to the moment of realization of the consideration for which the transferor is entitled to the consideration in the form of payment of the price.”

Thus, in the situation presented, the taxpayer was required to report income from the sale of shares in his annual return for 2023 at the full value specified in the share sale agreement. Thus, the tax to be paid will be on funds that, in real terms, the taxpayer has not yet received. This raises the question of what to do to avoid paying tax on income that realistically will not be received? The solution may be to determine the transfer of ownership of shares in parts. Then taxation will be carried out on the part received, which can have a positive effect on maintaining the taxpayer’s liquidity and organizing tax payments.