November 26, 2021

Volume XI, Number 330


November 24, 2021

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Changes in Poland's Taxation of Closed-End Investment Funds

Poland's Sejm has received a draft act on the amendment of personal income tax and corporate income tax. The amendment aims at changing taxation of investment funds.

Assumptions of the draft

The draft assumes repealing the existing regulations constituting a basis for exemption from corporate income tax for Polish closed-end investment funds (CIF) and foreign collective investment institutions of a closed type. 

Additionally, this draft stipulates that Polish Open-End Investment Funds (OIF) and Open-End Specialist Investment Funds (OSIF), except those applying investment rules and limitations specified for closed-end investment funds, will be covered by the exemption related to income (revenue) - in place of the existing exemption relating to the type of entities covered. Exemptions related to income (revenue) includes income (revenue) from interest, dividends and other revenue from participation in the profits of legal persons, disposal of claims, foreign exchange, shares and other securities, including derivative financial instruments or exercising of rights arising from them. The exemption does not apply to income from operational activity, e.g. lease.

The new exemption will also refer to collective investment institutions from the EU countries, meeting certain criteria (assumed to be equal to Polish OIF and OSIF).

Purpose of the draft

Notwithstanding the UCITS Directive, the authors of the draft believe that the existing model of taxation of income through investment funds have adverse consequences, especially in the area of operation through the national CIFs.

In the opinion of the authors of the draft, funds of this type are one of the main elements of building structures for tax planning with the use of foreign entities (mainly tax transparent), by way of placement of CIFs in a chain of entities conducting economic activity and transfer of income from this activity, in a major part, to CIFs. Additionally, the authors of the draft point out that CIFs are used by entities possessing substantial capital for tax optimization, by way of which they are privileged in relation to small and medium-size enterprises.

Consequences of changes

The planned amendment means that as of January 1, 2017, income (revenue) of Polish closed-end investment funds (CIFs) and foreign collective investment institutions of a closed type will cease to be exempt from corporate income tax. Polish open-end investment funds (OIF) and open-end specialist investment funds (SFIO) will be covered by the new exemption, except for the funds applying rules and limitations specified for closed-end investment funds, provided the exemption does not cover income obtained from operating activity, e.g. lease.

The existing taxation of investments through CIFs substantially refers to investors at the stage of realization of profit (exit from the investment). As a result of the amendments, CIFs are to be subject to taxation identically to Polish capital companies, so the amendment in question will create a situation whereby there will be double taxation of the profits paid, one at the fund level, and second time at the investor level. Consequently, the amendment will have an adverse impact on the finances of the investor investing through a structure including a closed-end investment fund.

We recommend investors with assets in funds structures (domestic and foreign), in particular investing through national CIFs or equivalent foreign funds, undertake a thorough analysis of the changes which in accordance with the intent of the authors shall take effect from 1 January 2017.

Copyright 2021 K & L GatesNational Law Review, Volume VI, Number 313

About this Author

Adrian Jonca, KL Gates, Tax Litigation Lawyer, Poland, Evasion Investigations Attorney

Adrian Jonca is a partner in the firm’s Warsaw office. He focuses his practice on tax matters and has extensive experience in tax litigation proceedings at both the trial and appellate levels. He regularly acts as a tax advisor for foreign companies in Poland and represents tax payers in VAT and CIT matters, capital duty disputes, and other tax claims. In addition, he represents management in employment litigation and related tax matters, including investigation of allegations due to tax fraud or tax evasion.

Katarzyna J. Stec, KL Gates, tax planning attorney, restructuring projects lawyer

Ms. Stec is a senior associate in the firm’s Warsaw office. She focuses her practice on national and international tax law, particularly corporate income tax, personal income tax, VAT and transfer tax (capital duty). Her practice focuses on on-going and transactional tax advisory, tax planning and restructuring projects, tax litigation in front of tax authorities and administrative courts, administrative enforcement proceedings with respect to tax arrears as well as tax review and due diligence projects.

Prior to joining K&L Gates, Ms. Stec...