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Elimination of income tax exemption for closed-end investment funds

On the last day of October a notice was published on the Sejm website on filing of a parliamentarian’s bill to amend the Personal Income Tax Act and the Corporate Income Tax Act. The changes to the CIT Act, to enter into force on 1 January 2017, would eliminate the exemption from corporate income tax for closed-end investment funds (FIZ). This exemption has been used as a major instrument for tax optimisation, for example for entities involved in trading of debt and real property, and for taxpayers seeking protection against rules governing controlled foreign corporations (CFC).

State of the law in 2016

Art. 6(1)(10)–(11) of the Corporate Income Tax Act provides for a subjective exemption from CIT for investment funds operating on the basis of Poland’s Investment Funds Act as well as collective investment undertakings operating in another member state of the European Union or European Economic Area, upon fulfilment of certain additional conditions. This exemption for foreign funds was added to the CIT Act from the beginning of 2011 and then amended from 4 December 2011.

This subjective exemption means that investment funds of whatever type do not pay CIT, e.g. on gains from the sale of securities, interest and dividends received, etc. The purpose of the exemption is to avoid double taxation of such income on the part of the fund’s participants, because income obtained by the investors (e.g. from redemption of their participation units or investment certificates) is subject to income tax. From the investor’s point of view, this exemption allows taxation of income generated by the investment fund to be postponed until the gains are actually realised by the investor, and the tax obligation is not linked to specific investment decisions made by the fund managers.

Planned changes

The published proposal would radically alter the tax situation of investment funds, particularly closed-end funds (FIZ). Below we discuss the premises of the bill’s proponents.

Elimination of subjective exemption for investment funds

The proposed amendment of the CIT Act provides for a change in the nature of the exemption for investment funds from a subjective exemption (i.e. based on the entity) to a mixed subjective/objective exemption (i.e. based on the entity and the subject matter). It would repeal Art. 6(1)(10)–(10a) of the CIT Act (governing the subjective exemption) and add a new Art. 17(1) (57)–(58).

The modified exemption would be subjective (applicable to investment funds) but also objective because it would apply only to certain strictly defined types of income, namely interest, dividends and other income from participation in the profit of legal persons, and gains from the disposal of receivables, currencies, shares and other securities, including derivatives, or from exercise of rights arising under such instruments. Consequently, the exemption would not be available, for example, for income or gains from investments in real estate.

Potentially even more important, the exemption would apply only to open-end investment funds (FIO) and specialist open-end investment funds (SFIO). However, in the case of SFIOs, the exemption would not be available for funds in which, pursuant to the Investment Funds Act, the investors have decided to adopt the investment rules applicable to closed-end funds (FIZ). This would mean, among other things, elimination of the exemption for FIZs, including specific types of FIZs such as, for example, securitisation funds, regardless of the subject of their investments.

The bill also modifies the conditions for availability of the subjective/objective exemption for foreign funds sharing the characteristics of Polish FIOs or SFIOs. In the proposed point 58 to be added to Art. 17(1), there would be an exemption for foreign entities if:

  1. They are subject to income tax in the state where they have their registered office on all of their income, wherever obtained.
  2. The only subject of their activity is collective investment of funds raised through a public offering of participation units in securities and money-market instruments.
  3. They operate pursuant to a licence from the competent financial market regulator in the state where they have their registered office.
  4. Their activity is subject to direct supervision by the competent financial market regulator of the state where they have their registered office.
  5. They have a depository holding the fund’s assets.
  6. They are managed by entities operating pursuant to a licence from the competent financial market regulator of the state where such entities have their registered office.

Moreover, this exemption for foreign collective investment undertakings would be applied under the condition that there is a legal basis provided for in a tax treaty or other international agreement which Poland is a party to for the Polish tax authorities to obtain tax information from the tax authorities of the state where the taxpayer has its registered office.

And, in order to establish consistent conditions for application of the exemption for Polish and foreign undertakings, there is an exception for situations in which the foreign fund has the characteristics of a Polish FIZ. The proposed Art. 17(12) of the CIT Act states that the exemption referred to in Art. 17(1)(58) would not apply to collective investment undertakings where:

  1. They operate in the form of a closed-type collective investment undertaking or are an open-type collective investment undertaking operating under the investment rules and restrictions applicable to closed-type collective investment undertakings.
  2. Under their founding documents their participation units are not offered through a public offering or admitted to regulated trading or an alternative trading system, and can also be acquired by natural persons only if they make a one-time acquisition of participation units of no less than EUR 40,000.

Tax consequences of fund investments in connection with disposal or redemption of participation units or investment certificates

The proposed amendment of the CIT Act also clarifies the tax consequences—on the income side and the cost side—of investments by funds in connection with disposal or redemption of participation units or investment certificates.

The proposed new Art. 12(4)(26) of the CIT Act states that income would not include values received by an investment fund as contributions in the form of cash, securities, or shares in a limited-liability company in exchange for sale of participation units or investment certificates to participants in the fund (or participants in a sub-fund in the case of funds with divided sub-funds). Similarly, the proposed new Art. 16(1)(72) provides that deductible revenue-earning costs would not include amounts paid out by an investment fund for redemption of participation units or investment certificates, or payments of income or gains of the investment fund to participants in the fund if the statute of the fund provides for payment of such amounts to participants without redemption of participation units.

The purpose of this is to ensure that the fund’s settlements with investors do not affect the basis for taxation of the fund.

Tax exemption for interest and dividends

The proposal provides for an exemption from flat-rate tax at the source for interest, dividends and other passive income referred to in CIT Act Art. 21–22 paid to non-resident investment funds. It also does not impose any additional conditions for that exemption, and thus under the proposed Art. 26(1g) the following would be required:

  1. Documentation by the entity referred to in Art. 6(1)(11a) and Art. 17(1)(58) (i.e. the foreign fund) of the location of its registered office for tax purposes, with a residency certificate obtained from the entity.
  2. Filing by the entity of a written statement that it is the true owner of the amounts paid out and that it meets the conditions referred to in these regulations.

And under the proposed Art. 26(1h), fulfilment of these conditions would not depend on the existence of a legal basis for exchange of tax information between Poland and the country in the European Economic Area where the foreign fund has its registered office.

No obligation to file a tax return for funds obtaining only exempt income and gains

In order to reduce administrative burdens, the proposed amendment of the CIT Act provides that funds subject to unlimited tax liability in Poland obtaining solely tax-exempt income or gains in the tax year would not be required to file a tax return. This issue is addressed in the proposed Art. 27(1d).

Planned entry into force from 2017

The bill provides that the new regulations will enter into force on 1 January 2017. This would require the bill to be passed and signed into law by the President by the end of November 2016. This is not an unrealistic deadline. As an MP’s initiative, the bill can be fast-tracked, because no interministerial or social consultation is required and the proponents do not have to prepare a regulatory impact assessment.


According to the proponents of the bill, the income tax exemption for closed-end investment funds (FIZ) has led them to be exploited by people with large amounts of capital at their disposal to manage their assets as a tax optimisation tool. The justification for the proposal claims that these types of “private financial vehicles” are established by entities investing at least some tens of millions of zloty. In their view, this tax privilege makes it harder for smaller entities to compete on the investment fund market. It is hard to agree with that claim, as the level of investments in FIZs is often only a fraction of that amount. Moreover, limiting the scope of the CIT exemption to open-end investment funds (FIO) and specialist open-end investment funds (SFIO), among other reasons due to the much higher costs of establishing and managing them, may make it harder for smaller entities to access this form of activity. Moreover, the very fact of double taxation—once at the level of the fund and again at the level of the investor—may drive any FIZs from the market, as after entry into force of the proposed changes they would be taxed the same as companies or joint-stock limited partnerships (SKA), but with the costs of maintaining an FIZ about 10 times greater than for a limited-liability company.

The justification also states, “Despite the change … taxing joint-stock limited partnerships from 1 January 2014, the phenomenon of tax optimisation exploited by FIZs has not been completely eliminated. Entities operating in other EU countries whose legal systems provide for legal structures analogous to the SKA, i.e. tax-transparent entities without legal personality but entitled to issue securities (such as the Luxembourg SCSp type of partnership—société en commandite spéciale) have taken the place of joint-stock limited partnerships.” But the authors ignore a whole group of FIZs that are established and maintained not to mingle with international tax structures and obtain purely tax advantages—for example, funds whose purpose is to make investments in private equity, venture capital or real estate. Funds of this type have nothing to do with tax optimisation, but under the proposed amendment of the CIT Act they would have to pay corporate income tax of 19%.

The lack of a CIT exemption for all FIZs would at the least give a strong jolt to the whole financial sector and cause the collapse of numerous entities, such as fund managers, whose business model is based on the use of closed-end investment funds.

Excluding the availability of a CIT exemption for foreign investment funds could also reduce the investment attractiveness of Poland, negatively impacting macroeconomic indicators.

Potentially, foreign investors might seek protection of their existing entitlements through international arbitration under bilateral investment treaties.

Joanna Prokurat, Tax Practice, Wardyński & Partners