TAX Alert | November 2016 | Fast track to taxation of investment funds

As of 15 November 2016 the Polish Parliament passed an act amending PIT and CIT Law, as well as the Polish Tax Code. The amending act refers mainly to taxation of investment funds and protective nature of individual tax rulings issued before the general anti-avoidance regulations (GAAR) came into force.

It is to be underlined that a draft of this amending act was substantially changed at the stage of works in the Parliament. Below we present the most important, in our view, assumptions of the act. At the same time please note that the act will be still subject to the approval of the Senate and further forwarded to the President. However, we suppose that its final shape will remain unaltered.

According to this act:

  • Open-end investment funds and specialized open-end investment funds (acting based on both the Polish as well as foreign law) will benefit from subjective tax exemption, however the sole subject of their activity should be limited to location of financial means into securities and money market investments:
  • Closed-end investment funds (both Polish and foreign) will no more benefit from subjective tax exemption, however some types of their income will be still exempt within specific tax exemption and considering further exclusions;
  • The following types of income of closed-end funds (both Polish and foreign) will be excluded from exemption:
    • Incomes derived from shares in Polish companies without legal personality or in foreign entities not treated as legal persons and not subject to taxation on the worldwide income in their domestic tax residence (so in fact incomes from share in tax transparent entities);
    • Incomes from interest on loans and on other liabilities of tax transparent entities against the funds;
    • Incomes from interest on shares in tax transparent entities;  Donations or any other free-of-charge or partially free-of-charge performances of tax transparent entities;
    • Incomes derived from interest on securities issued by the tax-transparent entities and from disposal of such securities;
  • individual tax rulings issued prior to the date when the GAAR came into force (15 July 2016) and referring to the activities resulting in tax benefits to be gained after 1 January 2017 r. will have no protective nature in case the GAAR will be applicable.

Practical consequences of the amendments

In our opinion the passed amendments will cause taxation of inter alia:

  • open-end investment funds, whose subject of business activity is location of funds in property rights other than securities or money market instruments (e.g. real estate);

  • income of closed-end investment funds derived from structures involving tax transparent vehicles. In addition to that in case the CIT exemption is no longer applicable, it may also mean a necessity to pay withholding taxation on transfer of passive incomes to the funds.

Our recommendations:

  • review of characteristics of particular investment funds aiming at determining whether they still may be subject to CIT exemption and to what extent;
  • in case non ground for continuation/benefiting from CIT exemptions are tracked, creating the accrual for on-going, latent and/or withholding taxation, depending on the requirements of a given fund;
  • verification of restructuring schemes (in particular these more complex, with many stages and vehicles involved) performed within the last 5 years aiming at determining the existing level of risk of applying the GAAR.

In particular determining whether the required „defense file”, presenting the business rationale behind such actions, was created. In case of any specific questions related to your particular situation that may be caused by these amendments or for further details, please do not hesitate to contact us.