A foreign group that funds its Polish subsidiary with intercompany loans usually reaches a point where the debt is simply not going to be repaid in cash. The money has gone into the business, the payable keeps growing, and the group would rather carry it as equity than as a liability that drags down the subsidiary’s balance sheet. Converting that loan into share capital is the standard way to do it - a quiet, one-off corporate exercise rather than a transaction. The mechanics are straightforward once you see that a conversion is not a special instrument at all: it is an ordinary capital increase, paid for with the loan instead of with new money.
What a conversion actually is
A debt-to-equity conversion (konwersja wierzytelności na kapitał) is a resolution of the shareholders to increase the company’s share capital, where the person taking up the new shares pays for them with a claim they already hold against the company rather than with cash. Economically the result is a single clean swap: the loan disappears as a liability and the same value is added to the company’s equity - part as share capital, the rest usually as share premium. Nothing leaves the company and no cash moves in either direction, which is exactly why groups reach for it to improve a subsidiary’s balance-sheet ratios, whether to support financing that is already in place or in the run-up to raising new financing.
Set-off or contribution in kind?
Polish law lets you reach the same result two ways, and the choice matters more than it looks.
The first is a cash increase settled by a contractual set-off. The shareholders resolve an ordinary cash increase; the company then has a claim against the shareholder for payment, the shareholder has the loan claim against the company, and the two are extinguished against each other by agreement. Polish law allows this specifically: a shareholder may not unilaterally set a claim off against the company’s call for payment on the shares, but a contractual set-off between the two is expressly permitted (Art. 14 § 4 of the Commercial Companies Code, “KSH”).
The second is a contribution in kind: the loan receivable itself is the contribution, assigned to the company, and the debt then lapses because creditor and debtor have become the same person.
In practice the set-off route is the usual choice. It is the simpler of the two - a standard capital increase plus one set-off agreement - so the registry court receives the most ordinary set of documents and has nothing unusual to query. The in-kind route is not dramatically harder, but it carries a little more work and, as the next section explains, a different tax profile.
Is a conversion a taxable event?
This is a tax question, and I am an advocate, not a tax adviser: treat what follows as orientation and confirm the detail with your Polish tax adviser - but the headline drives the whole choice of technique.
For the company, a conversion is neutral: amounts received to increase share capital are not income (Art. 12(4)(4) of the Corporate Income Tax Act, “CIT”).
For the shareholder, the two techniques diverge. Income on taking up shares arises only for an in-kind contribution (Art. 12(1)(7) CIT). A genuine cash contribution settled by set-off is not caught - cash paid for shares is not income by its nature - so, following a 2018 general ruling of the Minister of Finance, the set-off route does not create an income event for the contributing shareholder, while the in-kind route does. That is the real reason the set-off route is preferred, over and above the lighter paperwork. Two qualifications: older commentary still repeats a pre-2018 line under which the authorities treated every conversion as an in-kind contribution whatever the label, so the position above is the current one rather than a settled constant; and where the loan being converted includes accrued interest, that interest can be income for the shareholder on conversion even when the principal is neutral.
How much goes to share capital, and how much to share premium?
Transfer tax (PCC) of 0.5% is charged on the amount by which share capital is increased - and it is the company whose capital is raised, not the shareholder, that pays it. Anything booked as share premium (agio) - the surplus over the nominal value of the new shares, taken to supplementary capital - is outside the PCC base and is also neutral for the company (Art. 12(4)(11) CIT). So the split between share capital and premium is what decides the transfer-tax cost.
Two cautions. The split is not a free lever: it has to be justified by the company’s actual situation, and an allocation made only to reduce tax can draw the general anti-avoidance rule - a point to clear with the tax adviser in advance. And the shares issued, counting nominal value and premium together, should match the value of the loan being converted. If they fall short - say a loan of PLN 1,000,000 is converted into equity of PLN 600,000 - the PLN 400,000 difference is not quietly written off: it is treated as a taxable waiver of debt for the company (Art. 12(1)(3) CIT). This is where converting a loan into an under-capitalised or loss-making subsidiary gets delicate, because the receivable’s real worth and the equity you create have to line up - and if the company is near the edge, the board has its own filing duties to watch at the same time.
What the process looks like, and how long it takes
The conversion is an ordinary capital increase. The shareholders pass the increase resolution, as a rule by a two-thirds majority and in the form of a notarial protocol where it changes the articles of association (Art. 255, 257 KSH); the shareholder’s declaration taking up the new shares is made in notarial form, which for a foreign parent means signing through a proxy under a notarial power of attorney. The set-off agreement is then signed, the management board declares that the contributions have been made in full, and the increase is filed with the registry court within 6 months of the resolution. The increase takes legal effect only when the court enters it in the register (Art. 262 § 4 KSH) - so, unlike paying a dividend, equity does not change on the day of the resolution. There is no creditor-notification procedure and no three-month wait of the kind a capital reduction triggers, so registration is usually a matter of a few weeks.
What this means for you
If your Polish subsidiary is carrying intercompany debt that will not realistically be repaid, converting it into equity is a low-drama way to tidy the balance sheet and lift the equity ratios that lenders and auditors look at. Done as a set-off it uses standard documents and does not create a tax event for the lending group company. The two things that turn it from routine into a problem are a mismatch between the debt and the equity created, and external financing whose terms you have not checked.
Watch out
- A shortfall is a taxable waiver. If the equity created - nominal value plus premium - is less than the loan, the gap is income for the company. Match them: this is the main reason not to convert a distressed loan carelessly.
- Get the lender’s consent first. If the subsidiary already has bank or other external financing, a change to its capital will as a rule require the financing institution’s consent under the facility documents. Obtain it before you start the conversion, not afterwards.
- Mind the interest. Converting capitalised interest, rather than principal alone, can create income for the shareholder and raises a separate question of when the company may deduct it. Flag it to the tax adviser.
Next steps
- Confirm the loan balance to be converted and decide how much becomes share capital and how much share premium.
- Check the subsidiary’s financing documents for a consent or notification requirement and clear it with the lender.
- Confirm the tax position - set-off versus in-kind, and the interest element - with your Polish tax adviser.
- Prepare the increase resolution, the declaration taking up the shares (notarial, via proxy for a foreign parent) and the set-off agreement.
- File with the registry court within 6 months, and treat the equity as changed only from the date of entry.