Typical due diligence issues
It is most common to finalize the due diligence before executing the acquisition agreement. In rare cases, the parties agree on a confirmatory due diligence that takes place after signing, but prior to completing the transaction (this can be either full confirmatory due diligence, or limited to specific areas). In these circumstances, it may be a condition to closing that the outcome of the confirmatory due diligence is satisfactory.
The scope of the legal due diligence will largely depend on the specific transaction and the target involved, but typically covers: corporate; real property; employment; regulatory; financing; material contracts; litigation; environmental issues; IP/IT; and data protection. Considering the limitations described below on the acquisition of agricultural real property (that affect both foreigners and Polish entities), the verification of title to relevant real property (both in ownership and perpetual usufruct) and the status of real property are crucial issues to consider in the context of the acquisition of shares and real property assets. Recently, areas such as environmental, social and governance and compliance due diligence are also coming within the scope of the due diligence exercise. In addition, in Poland, it is increasingly common to conduct IT-specific due diligence.
Based on the due diligence exercise, the parties will identify issues requiring rectification as conditions precedent to closing, as well as additional measures of protection to be provided to the buyer under the purchase agreement, e.g., specific representations and warranties, indemnifications, price retention mechanism (most commonly, escrow account or deferred purchase price payment) or a reduction in the purchase price.
Pricing and payment
For both share and asset transactions, there is no legal requirement to have an independent appraisal report to support the valuation of the company or assets, respectively.
In an asset deal, Polish law distinguishes between the acquisition of assets and business as a going concern. A proper qualification of an asset deal is crucial from a tax perspective and should be performed by the tax advisers. Similar but independent qualifications should be performed from a contract law and employment perspective; the outcome of these qualifications will determine which legal procedures will apply to the asset transaction.
There are no specific restrictions regarding payment of the purchase price in Poland. The purchase price may be expressed and paid in any currency. It is usually wire transferred to the seller on the closing day or deposited in an escrow account before completion of the transaction, with release instructions to be signed upon closing. In the case of acquisition of shares in joint-stock companies, payments are quite often made with an intermediation of a brokerage house. However, payments exceeding certain thresholds cannot be made in cash.
Signing/closing
It is most common, especially in share deals, for the transaction to be completed in two stages, i.e., signing and closing. Usually, closing is conditional upon satisfaction of specific conditions precedent agreed between the parties or set by law, such as obtaining regulatory approvals (e.g., merger control or foreign direct investment approval) or waivers/consents of third parties to the transaction (change of control clauses), completing restructuring (e.g., spin-offs, asset carve-outs), obtaining financing for the transaction or rectifying certain issues discovered during the due diligence process.
In asset deals, one of the crucial conditions to closing is usually obtaining creditors' consents for the transfer of all (or material) contracts, as this is a legal requirement for an effective transfer of a contract in an asset transaction.
Foreign investment restrictions
Poland has a mandatory and suspensory foreign investment screening procedure, which means that transactions that meet certain criteria need to be notified to the relevant authority and cleared before they can be completed. Notwithstanding the foregoing, in some circumstances the notification obligation is only triggered after the material stake in, or dominance over, the protected company (i.e. the company that is subject to the foreign investment screening procedure) has been acquired.
The foreign investment review regime is limited to certain sectors. For further information, see the more detailed section on "Foreign investment restrictions".
Antitrust/merger control
Poland has a mandatory and suspensory merger control regime, which means that transactions that meet the relevant criteria need to be notified to the competition authority and cleared before they can be completed.
It is also necessary to consider EU merger control rules. Mergers involving companies active in several member states and reaching certain turnover thresholds are examined at European level by the European Commission. This allows companies trading in different EU member states to obtain clearance for their mergers in one go. For further information, see the more detailed section on "Antitrust/merger control".
EU Foreign Subsidies Regulation
As of 12 October 2023, the EU Foreign Subsidies Regulation (FSR) requires qualifying transactions, and bids in response to certain large public tenders in the EU, to be notified for upfront clearance by the European Commission where the companies involved have benefited from foreign financial contributions (a broad concept) that exceed certain (low) thresholds. Acquisitions of a target with annual revenues in the EU of at least EUR 500 million will trigger FSR deal notifications. Acquisitions of smaller targets will not, regardless of deal value. Outright mergers and large joint ventures will trigger a notification requirement if the EUR 500 million EU-wide revenue threshold is met by one of the merging parties or the joint venture.
Other regulatory or government approvals
Permit for acquisition of real property or shares in a company holding real property
Purchasing real property by foreigners is governed by the Act on Acquisition of Real Estate by Foreigners of 24 March 1920 ("Act on Acquisition of Real Estate by Foreigners"). With certain exceptions (e.g., a company's transformation), a permit is required in each case of real property purchase (i.e., acquisition of ownership title or perpetual usufruct right to real property or purchase, or taking up of shares in a company that has a registered place of business in Poland and is the legal owner or perpetual usufructuary of the real property). A permit is required if, by purchasing shares in a company that is the legal owner or perpetual usufructuary of real property, a foreigner will take control of that company, or if shares in an already-controlled company are acquired or taken up by a foreigner who is not the company's shareholder. The minister of internal affairs may grant the foreigner a permit to purchase real property or shares in a company owning real property if there is no probability of threat to national security, public safety or public order, and if the foreigner can demonstrate the existence of circumstances confirming the foreigner's ties with Poland.
In general, the above obligation does not apply to residents of the European Economic Area (EEA) and/or Switzerland.
Acquisition of agricultural real property or shares in a company holding agricultural real property
The Act on Shaping the Agricultural System introduced several limitations on the transfer of the legal title to agricultural real property, transfer of shares in companies holding agricultural property or reorganizations of companies holding ownership or perpetual usufruct rights to agricultural real property.
In principle, only persons meeting certain criteria (such as individual farmers) may acquire agricultural land. Other entities are obliged to obtain the consent of the head of the National Agricultural Support Centre (NASC) before the effective transfer of the title to the land. There are several exceptions to this. Among others, the limitations do not apply to agricultural real property of specific size or that is located on the areas designated in the local zoning plans for non-agricultural purposes.
The NASC also has a preemptive right in relation to the purchase of shares in companies that hold ownership title to agricultural real property. This preemptive right does not apply to the sale of stocks on the stock exchange.
The NASC also has various other rights relating to mergers, divisions, transformations and acquisitions of shares in companies holding agricultural real property. These limitations are taken into account when structuring the transaction, most commonly as conditions to closing.
Acquisition of real property subject to the statutory pre-emption rights
In transactions involving the acquisition of rights to real estate, attention should also be paid to statutory rights of pre-emption, which may apply, mainly in connection with the specific status of the real estate or its location. Such pre-emption rights of the State Treasury may concern among others: (i) properties located in a special economic zones, (ii) forests (iii) undeveloped real properties acquired by the seller from the State Treasury or local authorities, (iv) real properties located in the areas designated for revitalization, (v) lands comprising inland standing waters, etc.
Other regulatory requirements
For acquisitions of control of financial institutions (e.g., banks, insurance companies, investment and pension funds, or investment firms) and of companies operating in specific sectors, such as telecommunication, energy, media, air and railway transport sectors, the approval of the relevant industry regulator is usually required before the share sale transaction due to change of control. The definition of control and the rules for the issuance of this regulatory approval vary according to the rules of the specific regulatory authority, depending on the specific sector or industry. These regulations are applied equally to foreign and domestic investors.
In asset transactions in a regulated industry or sector, it is commonly required to obtain new permits and approvals for operation.
Within seven business days of the share transfer, disclosure of changes to the target's beneficial owners must be disclosed in the Central Register of Beneficial Owners. As the filing can only be made electronically, and may involve extensive documentary preparation, it is prudent to consider the requirements well in advance of closing.
Share sale
In share acquisitions, there is no change in the employer/employee relationship, so consent from employees or unions is not required. Notice to employees, unions or works councils is not required. Notice to employees, unions or works councils may be required in case of changes in the employment sphere, e.g., planned redundancies or changes in organization of work in accordance with applicable provisions of Polish law.
Despite lack of explicit legal obligation, the employee, unions or works council could be proactively notified about the share sale for transparency reasons.
Asset sale
The employee transfer procedure is fairly simple. In an asset acquisition that involves the transfer of a business as a going concern or its part, the employees transfer automatically. Polish law requires notification of unions or the employees (if there is no union) 30 days in advance of the transfer. The notice must include: (i) the proposed date of the transfer, (ii) the reasons for the transfer, (iii) the legal, economic and social implications of the transfer for the employees, and (iv) any measures envisaged affecting the conditions of their employment, in particular the conditions of work, remuneration and retraining.
If there are trade unions and the current employer is aware of any actions regarding employment conditions, negotiations with the trade unions will be required in order to conclude an agreement in this regard (within 30 days of notification of such actions). If the employer and the unions do not reach an agreement in the above period, the employer may take actions unilaterally, taking into account arrangements made with the unions.
If there is a works council, the employer is obliged to inform and consult with the works council on the transfer. Polish law does not determine the deadline or duration of such consultations, but usually it is done before or at the same time as information/consultation with employees/unions. The opinion of the works council is not binding for the employer.
The transfer of employees as a result of the transfer of the business or its part does not require the termination of the employment agreements. Labor law foresees the transfer of the same employment terms and conditions to the acquiring company if the employees transfer together with the assets, as part of the economic activity. In the case of a part business transfer, the former employer and new employer are, by virtue of law, jointly and severally liable for the labor-related liabilities resulting from the period before the transfer. In the case of a full business transfer, the new employer is liable for any such liabilities.
The employees may terminate their employment agreements within two months of the transfer by serving the employer seven days' notice. This termination does not trigger payment of the severance pay, unless termination was caused by a severe change of the terms or conditions proposed or introduced by the employer.
Termination of the employees due to reasons solely related to the transfer is not allowed. However, termination as a result of post-transfer harmonization is justified.
An automatic transfer of employees results in a transfer and continuation of obligations of an employer as a tax remitter of personal income tax (PIT) for the employees transferred.
Share sale
The sale of shares in a Polish company is subject to 1% transfer tax, irrespective of the residency of the parties to the agreement and the place where the sale agreement was signed. The sale of shares is normally out of the scope of (or exempt from) Polish value-added tax (VAT).
From the perspective of a Polish corporate or individual seller, the capital gains on the sale of the shares will be subject to 19% corporate income tax (CIT) or PIT. Additionally, a so-called solidarity surcharge of 4% is applicable for individuals (on excess of their income above PLN 1 million, if their total income for the tax year exceeds PLN 1 million). There is no universal participation exemption regime under which these capital gains could be exempt from taxation. However, the participation exemption for Polish holding companies was introduced into the CIT regulations as of 1 January 2022. In order to benefit from the exemption, the selling Polish holding company must, among others, be established as a joint stock company, limited liability company or simple joint stock company, perform genuine business activity and hold at least 10% of shares for un uninterrupted period of at two years. Also, to benefit from the exemption the shares must be sold to unrelated party and upfront notice must be filed with the Polish tax authorities. The sale of real estate rich companies is generally excluded from the exemption regime.
For foreign sellers of shares (both individuals and entities), capital gains will also be subject to income tax (CIT/PIT) at the rate of 19%, if the capital gain is deemed to be from a Polish source. Foreign sellers can be protected from Polish taxation under the relevant tax treaty. If the foreign seller is domiciled in a jurisdiction defined by the Polish tax rules as a low-tax jurisdiction, 19% withholding tax on the payment may be applicable.
The tax loss carryforward of a company that has been subject to a change of control should, as a rule, continue to be carried forward, despite the change of control, pursuant to the general rules. There are limitations to the utilization of losses related to M&A transactions involving the acquisition of a business by existing entities. These limitations apply if the taxpayer took over another entity, acquired an enterprise or its organized part or the taxpayer received a cash contribution for which an enterprise or an organized part of an enterprise was acquired. The limitation applies only where: (i) the scope of the actual core business of the taxpayer will change, in whole or in part; or (ii) at least 25% of the rights to the taxpayer's profit were acquired by an entity not holding such rights before the transaction.
In a share deal, the buyer will inherit all past (hidden) tax arrears of the acquired company (i.e., the target). Carrying out due diligence is, therefore, of utmost importance. The statute of limitations in Poland is generally five years following the end of the year during which the deadline for paying the tax liability has lapsed.
Asset sale
The transfer of assets will normally be subject to CIT at the rate of 19% in the hands of the seller. As a result, the purchase will lead to a step-up in basis in the hands of the buyer, including goodwill on the sale of an enterprise or its organized part. In an asset deal, it is generally possible to offset the financing costs (if any) against the income from the acquired assets/business.
The sale of assets is normally subject to VAT at the standard rate of 23%. The transfer of certain assets and, as a rule, the transfer of going concern (TOGC) may be out of scope or exempt from VAT. The VAT due on the transfer is normally paid by the buyer to the seller, who will remit such VAT to the tax authorities.
TOGC, being out of scope of VAT, is subject to transfer tax at the rate of 1% (property rights) or 2% (movable and real estate assets).
The buyer of assets qualifying as an enterprise or an organized part of an enterprise can be held jointly liable for almost all of the tax arrears of the seller related to the seller's business activity, up to the value of the acquired enterprise or organized part of the enterprise. Joint liability can be avoided if a "clean" certificate (i.e., a certificate confirming that the seller has not defaulted on its tax obligations and has no tax arrears) is obtained from the relevant authority.
OECD's Two Pillar Solution
The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.
Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.
For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.