The Polish Corporate Income Tax Act provides for an exemption of income (revenues) of collective investment institutions headquartered in EU/European Economic Area member states. The exemption can particularly cover upstream distributions, including interest and dividends from Polish companies, as well as capital gains earned in Poland. This article explores the evolving landscape of the tax provision and its implications for foreign investment funds, with a particular focus on externally managed funds.
Investment funds can be managed externally or internally; i.e., without the assistance of an external fund manager. The choice between external and internal management is typically dictated by the individual needs and preferences of investors. Factors such as cost structure, desired level of control, investment strategy, and regulatory requirements all play a role in this decision.
Foreign investment funds may qualify for a tax exemption from Polish corporate income tax if they meet several criteria, the most important of which are the following:
Operating as closed-end investment funds or open-end funds with equivalent investment principles and limitations;
Being subject to taxation in their country of residence on all income, regardless of its source;
Falling under the direct supervision of competent financial market authorities in their home country; and
Being managed by entities operating under the authorisation of the competent supervisory authorities.
How application of the exemption has evolved
Historically, the application of this exemption has presented significant challenges. Prior to the end of 2021, tax authorities generally contested the right to exemption-setting requirements, which were often impossible to meet.
The most contentious issue has revolved around the requirement for ‘direct supervision’ by the competent supervisory authority over the fund. Tax authorities have frequently denied the exemption in cases where supervision was exercised by an external fund manager, rather than directly by the fund. As a result, the application of the exemption for externally managed funds was, in practice, impossible.
A notable shift occurred in 2022 when the first positive tax rulings began to emerge. However, these rulings were predominantly issued in cases where taxpayers explicitly affirmed in their applications that they met all the conditions. It is worth noting that such rulings, when taxpayers are not entirely certain of their statements, may offer limited protective power.
A breakthrough came in Q1 2024 with the emergence of court rulings overturning negative tax decisions. These judgments asserted that the supervision requirement is satisfied even when oversight is performed via an external fund manager.
In the judgment, one of the lower courts emphasised that the tax authorities should not overlook the essential features and economic functions of externally managed investment funds. The court stated that the tax authorities disregarded the fact that while the fund's activities are effectively supervised by the competent financial market supervisory authorities of the state where the fund is based, this supervision is carried out through an authorised external manager.
Furthermore, the court highlighted that "minor differences should not be given decisive importance and should not prevent the granting of specific tax exemptions". This approach acknowledges the diversity of legal solutions across EU and European Economic Area countries, while emphasising their common goal.
Another court pointed out that the mere fact that, formally, supervision takes the form of oversight over the external manager – an entity closely related to the fund – should not determine the possibility of applying the exemption in question, if the fulfilment of all the other conditions is not in doubt. The court stressed the importance of fundamental EU law principles, such as non-discrimination and the free movement of capital and payments, stating that the form of supervision over activities (while asserting that supervision over the institution's activities is, indeed, exercised) cannot determine the final assessment of whether an entity is entitled to a tax exemption.
These judgments represent a significant shift in the interpretation of the direct supervision requirement, potentially opening the door for more foreign investment funds to apply the Polish tax exemption.
Implications of the developments and compatibility with EU law
The recent developments present opportunities and challenges for foreign investment funds considering undertaking operations in Poland. While the likelihood of successfully applying the exemption has increased, it remains crucial to carefully consider the fund's structure and management to ensure compliance with the Polish requirements. The direct supervision criterion, in particular, warrants close attention in light of the Polish tax authorities' approach. Additionally, and independently of the supervision issue, proper structuring to address a fund’s beneficial owner considerations is equally critical. Both these elements play a vital role in successfully navigating the exemption's application.
Adding to the complexity of the matter, an opinion issued by Advocate General Juliane Kokott on July 11 2024, in Case C-18/23 (F S.A. v Dyrektor Krajowej Informacji Skarbowej), addresses the compatibility of Polish tax regulations with EU law. The opinion responds to a preliminary question from the Provincial Administrative Court in Gliwice, specifically concerning tax exemptions for internally managed investment funds – a contrast to the externally managed funds discussed above.
The opinion stated that the Polish tax regulations, which grant exemptions only to externally managed funds while denying them to internally managed ones, do not constitute an indirect discrimination. As a result, no infringement of EU law has been identified in this respect. This case highlights the ongoing challenge of balancing national tax policies with EU fundamental freedoms.
Final thoughts on Poland’s tax exemption for foreign investment funds
While the Polish tax exemption for foreign investment funds has historically been a complex and often challenging area, recent court judgments suggest a more favourable and nuanced environment is emerging. Foreign investment vehicles should closely monitor these developments and evaluate how they might benefit from this evolving interpretation of Polish tax law.
However, in light of the significant problems related to the practice of applying withholding tax regulations in Poland (resulting, in many cases, in the unavailability of the exemptions resulting from the EU directives), confirming a broad exemption for this type of entity (and thus also covering dividends and interest received) may be a game worth the candle.
