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ECJ judgment on investment fund WHT
Under Polish corporate income tax (CIT) provisions, investment funds qualify for the exemption for withholding tax purposes only if their registered office is located in Poland or in another EU country (provided that the EU investment fund is comparable to Polish funds). Consequently dividends paid to non-resident (and non-EU) investment funds cannot benefit from withholding tax exemption. ECJ ruled that Polish legislation entails a restriction on free movement of capital which is prohibited in principle by article 63 of the EU Treaty.
ECJ judged that the free movement of capital rule applies in a situation where under national tax legislation dividends paid by resident companies established in an EU state to an investment fund established in a non-EU state are not subject to CIT exemption while, in similar circumstances, investment funds established in an EU state may apply for CIT exemption on dividends. In the ECJ's opinion the difference in the tax treatment of dividends may discourage, on the one hand, non-EU investment funds from investing in companies established in Poland and, on the other hand, investors being Polish residents from acquiring shares in non-EU investment funds.
ECJ assessed whether such a restriction could be considered as appropriate and based on legitimate reasons. In this respect ECJ did not support the Advocate General’s position who claimed that withholding tax on dividends paid by the Polish company to the US fund is justified since there is no legal instrument allowing Polish tax authorities to verify information provided by US funds, contrary to EU funds.
In particular ECJ pointed out that:
“there does exist a regulatory framework of mutual administrative assistance established between the Republic of Poland and the United States of America which permits the exchange of information which may be required for the application of the tax legislation. More specifically, that framework of cooperation stems from Article 23 of the double taxation convention and from Article 4 of the convention of the Organisation for Economic Co-operation and Development (OECD) and the Council of Europe, signed in Strasbourg on 25 January 1988, on mutual administrative assistance in tax matters”.
However, ECJ ruled that it is of the responsibility of the referring court to examine whether the above instruments providing mechanisms for the exchange of information between the Polish and the US authorities may in fact enable Polish tax authorities to verify the information provided by US investment funds.
To sum up, in the light of ECJ judgment it is not disputable that:
- The difference of tax treatment between Polish and non-EU funds violates the principle of free movement of capital
- This restriction cannot be justified by EU Treaty provisions
- There are legal instruments of exchange of information between Poland and the US
It happens that the above instruments of exchange of information are utilised by Polish authorities within tax proceedings (in order to verify evidence and information provided by the US entities). Therefore it may be proved that these instruments in fact enable Polish authorities to obtain relevant information.
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The ECJ judgment may significantly strengthen the tax position of non-EU investment funds in Poland when applying for withholding tax refund (on dividends). The Polish Supreme Administrative Court (SAC) has already issued 2 judgments confirming that the difference in tax treatment of a US investment fund, which is comparable to Polish investment funds, violates the rule of free movement of capital. The SAC pointed out that in the analysed case the difference in tax treatment between Polish and US funds cannot be justified. In particular it cannot be claimed that Polish tax authorities do not have a legal instrument of exchange of information with US authorities. The SAC decisions are final (they cannot be appealed). The Polish cases may be quoted in other EU countries where national legislation restricts the free movement of capital.
Application of withholding tax exemption to investment funds established in a non-EU country may encourage:
- These funds to invest in companies established in the EU
- EU-based investors to acquire shares in non-resident investment funds
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