Interruption of the time test when changing the amount of the share capital of a public limited company

Income from the sale of shares is taxable income. However, income from the transfer of shares for consideration is exempt from income tax if the period between the acquisition and transfer of the shares exceeds at least three years. In this context, the law provides for a number of case-by-case rules regulating under which circumstances this period is interrupted (it starts counting from the beginning) or under which situations its running is maintained. This period is often referred to as the time test.

Public attention has recently been attracted by a series of decisions of administrative courts, which was subsequently concluded in November 2021 by the Third Chamber of the Constitutional Court. The central point of contention between the parties was the assessment of whether the time test is maintained even if, during its course, the share capital of the issuing joint-stock company is nominally increased from its own equity and the shares are disposed of in such a way that they are exchanged (i.e. the original shares are replaced by new shares with a higher nominal value).

At the same time, the higher courts have concluded that the time test is not interrupted only when shares are "exchanged" by the issuer for other shares of the same total nominal value. This is essentially the case with stock splits, stock combinations, changes in the type or rights attached to the stock, or certain forms of corporate conversions. If a share is exchanged for a share of a higher nominal value, on the other hand, the time test will be interrupted and the shareholder who transfers the shares at that time must include the income so received in the tax base. 

In addition, the Court of Cassation concluded, contrary to the Regional Court, that there is no reason to distinguish between the various techniques of implementing a nominal capital increase, i.e. exchange or bypassing, since their economic effect, i.e. their effect from the point of view of tax administration, is identical. 

The reasons for the individual decisions also offer a general rule that if there is any change in the amount of the share capital, the time test is suspended without further delay. Against this it must be argued that the judicial review in the present case was limited to the so-called nominal increase in the share capital (from equity) by increasing the nominal value of the shares, which can technically be carried out in the above-mentioned ways, and that it can therefore in no way be generalised to arbitrary changes in the share capital.

Finally, we note that judicial review of public administration is almost invariably bound by the parties' allegations. It is likely, therefore, that there are serious and compelling arguments that the courts in this litigation simply have not had the opportunity to address, and which, in our view, would likely move the judges' position in the opposite direction.