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Polish CIT Act to Fully Exempt EU and EEA Funds
Under the Polish domestic rules, Polish investment funds are subject to a special Capital Income Tax (CIT) regime. Namely, the CIT Law provides for a full exemption from income tax for "investment funds operating pursuant to provisions of the Polish Act on Investment Funds". As a consequence, the funds covered by the Polish domestic regulations are subject to, but fully exempt from income tax in Poland. Taxand Poland highlights the benefits of the CIT regime and the change in exemptions.
As of 2011, the subjective CIT exemption is to be extended on funds from European Union and European Economic Area member countries. The adjustment is introduced as a result of the infringement procedure (No. 2006/4093) initiated against Poland by the European Commission stating that the Polish law currently in force could discriminate against foreign investment funds through their differentiated treatment in comparison to the similar Polish vehicles. Although Polish administrative courts tended to take note of this issue and applied the exemption also to foreign funds with similar characteristics (e.g. ruling of the District Administrative Court in Warsaw of 14 March 2008, regarding Luxembourgian fund harmonised with UCITS Directive), the necessity of introduction of statutory change was pressing to assure legal clarity in this respect.
At the beginning of 2011 the amended wording of the Polish CIT Law extends the applicability of exemption from Polish income tax to investment funds and collective investment institutions established in European Union or European Economic Area member states (other than Poland), if the below conditions are fulfilled jointly:
- The fund is subject to an unlimited tax liability in the country of its residence (it is likely that certificate of tax residence will be required by Polish administration in order to prove the "taxpayer" status of the given fund).
- The sole object of its activity is collective investment of funds - raised through public or non-public offerings of their fund's participation units - in securities, money market instruments and other property rights.
- Fund's activity must be carried out on the basics of permission issued by a competent authority from its state of residence.
- The fund must be supervised by such a competent authority.
- The fund must have a depositary maintaining a registry of its assets.
An additional requirement to apply the exemption is the existence of a legal basis for exchange of tax information between relevant tax authorities, arising from a double taxation agreement or other ratified international agreement to which Poland is a party.
Due to the fact that the wording of the amendment is far from being precise, it seems quite certain that in practice many problems in the application of these regulations may occur. At this stage, it is difficult to indicate precisely which foreign funds could benefit from the Polish CIT exemption. However, one should bear in mind that this amendment is aimed specifically at providing foreign investment funds with similar tax treatment to the investment funds existing in Poland. On the one side, it may be concluded that the exemption under the new Polish CIT regulations is broader than UCITs. At the same time, the specifics of the requirements may lead to the concern that some vehicles, of similar nature to the Polish funds, but not fulfilling all the above requirements, may not qualify for the exemption. Referring, as an example, to the Dutch investment vehicles - most likely the so called Fiscal Investment Institution or the "Dutch REIT" could apply for the beneficial Polish treatment. The exemption should be also applicable to the German, Luxembourgian and Cypriot funds. However, absolute certainty in this respect could only be achieved after obtaining an individual ruling issued by the Polish tax authorities.
The introduced amendments to the Polish CIT Law provide for the exemption from income tax for a potentially wide scope of investment vehicles. Consequently, income gained from the investments raised by the funds fulfilling the conditions outlined in the Polish CIT regulations will be free from taxation in Poland. The concern about the possible taxation of income may arise at the moment of upstream distribution of profits from such funds - however, this burden may also be avoided by proper structuring (i.e. with use of entities located in proper foreign jurisdiction).
Last but not least, it is worth mentioning that investment funds may be used in structures enabling full exemption from income tax of operational activity carried out by the entities controlled by the fund. Polish funds combined with Polish partnerships limited by shares (SKAs) - transparent entities for income tax purposes have become quite common structures in Poland, particularly in the real estate sector. In practice, they allow for effective exemption from income tax of operational income: income from all kind of profits, including services, capital gains, rental income, income from sale of developments etc. We assume that similar tax efficient solutions using Polish SKAs may be applied through the involvement of EU/EEA funds, which in theory implies that any business income gained in Poland may be exempt from income tax (if realised by SKAs held by qualified fund).
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