Law 5024/2023 (FEK A’ 41/24-02-2023) on the “Regulations for the acquisition of occupied real estate of the private property of the State, real estate of the National Defense Fund, other provisions for the private property of the State and other provisions under the responsibility of the Ministry of Finance”, amended inter alia the tax treatment of the contribution of securities of a natural person to a legal entity in case the contributor is the sole shareholder of the recipient.
Under the previous regime, the contribution of shares by an individual to a legal entity entailed the imposition of capital gains tax of 15% based on the difference between the market value of the transferred/contributed securities and their taxable value at the time of their acquisition.
The new regulation – Amendment of article 42 par. 4 of Law 4172/2013 (Income Tax Code – I.T.C.) pursuant to article 28 of Law 5024/2023
Pursuant to the new provision of article 42 par. 4 (c) of the I.T.C., which was added by Article 28 of Law 5024/2023, capital gains tax is no longer imposed on a natural person at the time of the contribution, since the acquisition price of the contributed securities is considered as selling price, provided that the individual who contributes the securities receives in return the total number of shares or company parts (100%) issued by the recipient.
The aforementioned regulation concerns natural persons, shareholders or partners, who contribute domestic or foreign securities to domestic or foreign legal persons or legal entities for the purpose of covering or increasing capital, in exchange for shares or partnership units or company parts of the recipient, provided that the contributor is the sole shareholder or partner of the latter. For the implementation of this regulation, the recipient must have as its object of business the exercise of a commercial, manufacturing, agricultural or service activity, such as, but not limited to, investment holding services and other investment services, and must be established in a tax-cooperative State.
Furthermore and consequently, this transaction (contribution of securities under article 42 par. 4 (c) of the I.T.C.) is not considered a “business transaction” from which profit from business activity arises within the meaning of para. 3 of Article 21 of the I.T.C., as amended by Article 29 of Law 5024/2023.
It is noted that the above exemption from capital gains tax, under the current legislative framework, is exhausted the first time the shares of the individual are transferred to the legal entity through their contribution to the latter. This is therefore in effect a “suspension” of taxation and a postponement of the tax liability of the individual to a later date, i.e. when the securities acquired by virtue of the contribution will be further transferred.
In particular, according to the same article, upon the subsequent transfer of the securities acquired by the contributor, the acquisition value of the contributed securities is considered as purchase price and therefore any excess value between the purchase price and the selling price will be taxed at that time.
However, it should be noted, that in case the recipient legal entity, being a tax resident of Greece, transfers the securities acquired under the contribution after twenty-four (24) months from the contribution, it (the recipient – transferring legal entity) is exempt from tax on the income arising from the capital gains on the transfer of these securities pursuant to article 48A of the I.T.C., provided that the other conditions of this article are met.
In the context of the above-mentioned contribution of shares to a legal entity, tax interest is also found in the distribution of intra-group dividends, since there is in principle an exemption from the 22% income tax for legal entities, as well as from the 5% withholding tax, provided that, subject to the fulfilment of other legal requirements (see articles 48 and 63 of the I.T.C.), the participation of the dividend recipient in the legal person distributing profits is retained for at least 24 months before the relevant decision for distribution of dividends is taken.
Let F be an individual, who holds shares (30% stake) in company A and contributes such shares to the newly established company B to cover its initial capital. Thus, F becomes the sole shareholder of company B and company B becomes a shareholder of company A (30%). At the time of the contribution to company B of the shares held in company A, F is not subject to capital gains tax pursuant to Article 42 para.4 (c) of the I.T.C. Subsequently, after 24 months from the above contribution, if company A decides to distribute dividends to its shareholders (including company B), company B will be exempt from 22% corporate income tax and from withholding tax on such distribution. Finally, if company B transfers the shares of company A after 24 months, company B will be exempt from tax on the capital gains tax for the transfer of securities.
The recent law, amending the provision of article 42 para. 4 of the I.T.C. with the addition of subpar. c’, has corrected the unequal tax treatment of individuals – as compared to legal persons – with regard to the imposition of capital gains tax on the transfer of securities. Thus, a tax incentive is now created for individuals who wish to transfer securities to a legal person in order to cover or increase its capital in exchange for shares or company parts in the latter, provided that the transferor is the sole shareholder or partner of the recipient.
This transaction does not constitute a capital gains tax event and, by an explicit provision of the law, is not considered a business transaction from which profit from business activity arises, while any tax liability is deferred to the time of transfer of the new securities acquired by the transferor. Consequently, this provision resolved the issue that had arisen to the detriment of individuals, i.e. the contributor being taxed at the time of the contribution of his securities, while still indirectly holding the contributed securities himself through his 100% shareholding in the recipient.