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As a result of recent Polish Corporate Income Tax amendments which came into force 1 January 2011, Corporate Income Tax (CIT) exemptions applicable to Polish closed-end investment funds have been extended to foreign funds, namely EU fund vehicles.

These recent amendments to Polish law have created new opportunities for tax planning making the use of a Cypriot Private International Collective Investment Scheme (PICIS) the most tax and cost efficient way to invest into Poland.

The following is a summary of various tax planning opportunities available to investors with projects in Poland, including real estate, mining and energy related, leasing, stock exchange investors, general trading companies and others.

A.Closed Investment Fund (CIF)

Closed Investments Funds, or CIFs (commonly referred to as a “FIZ” in Poland), are a popular method of carrying out business activities in real estate investment and other projects in Poland. Such Polish funds may also be used in carrying out any unregulated business activities, including leasing, trading activities, etc. CIFs are very effective in terms of tax optimization, as the corporate tax rate is reduced to nil where the CIF carries out business activities through Polish joint-stock partnerships (JSP).

A CIF is a corporate body that may be established only by an Investment Management Company (commonly referred to as “TFI”) which acts as the management body of the CIF. The CIF issues investment certificates to investors for consideration of cash or assets in kind. Such investment certificates are considered securities under Polish law.

Most importantly, CIFs are entities fully exempt from CIT in Poland, however, their activities and transactions are subject to other taxes like VAT and transfer taxes.

A JSP on the other hand is considered transparent for CIT purposes (i.e. partners and shareholders are taxed on their share of the JSP’s profit). JSPs consist of at least two partners– an active partner and shareholder. The active partner is liable for all liabilities of the partnership whereas a shareholder is not liable for any of the partnership’s debts and has only limited influence on the JSP’s activities.

Description of the structure:

Under this structure, an investor sets up a Polish limited liability company (LTD) with a minimum share capital of PLN 5,000. The Polish LTD is required as an active partner of the JSP and will bear all potential liabilities and will manage the JSP on behalf of the Investor. Simultaneously, the TFI sets-up a CIF which will issue investment certificates to the investor. The LTD, being the active partner, and the CIF, being passive shareholder, will then establish the JSP. The capital of the JSP can be covered by the LTD (1%) and the CIF (99%), for example.

Once the JSP is capitalised, it can commence business activities that may consist of purchasing/selling immovable property, carrying out real estate developing activities, mining projects, generating rental income, etc.

Taxation in Poland

As mentioned above, the JSP is a tax transparent entity. Therefore, income generated by the JSP is subject to corporate taxation at the level of the CIF and LTD. As the CIF is exempt from CIT, profits of the JSP allocated to the CIF are tax free (in the example above, 99% of income would be exempt from Polish CIT). The income allocated to the Polish LTD is taxed at the standard corporate income tax rate of 19% (in the example above, only 1% of income is taxable).

The result it that distribution of profits to unit holders can be optimized so that there is no tax.

Polish Considerations

The CIF is subject to the following conditions in order to qualify for the CIT exemption:

  • Requirement of asset differentiation i.e no more than 20% of funds to be invested in one project;
  • Negotiations with TFI and Polish Financial Supervisory Authority (Komisja Nadzoru Finansowego);
  • Agreement with TFI, depository bank, valuators, auditors;
  • Cost / Benefit analysis.
  • Transfer of assets to CIF.

International Collective Investment Scheme- the Cyprus solution

Polish CIF and JSPs have recently become very popular vehicles used for investment in Poland. Such a structure allows for exemption of operational profits and capital gains from CIT. However, the main disadvantages of this solution are the relatively high cost of implementation and maintenance of the structure, and also the obligation for asset differentiation.

As of 1 January 2011, amendments to Polish CIT Law came into force resulting in the above mentioned CIT exemptions being extended to EU funds.

Therefore, the recent amendments to Polish tax laws open a wide range of opportunities for tax planning that involve foreign investment funds. It is now possible to plan structures that will allow the following:

  • Tax exemption of the operating profits of JSPs registered in Poland;
  • Withholding tax exemption with respect to interest, dividends and royalties paid by Polish companies;
  • Tax exemption of capital gains, including profits from the sale of bonds, stocks, shares and real estate.

Investment into Poland can now be made with no or little Polish tax exposure, with potential beneficiaries including real estate developers, companies involved in the energy sector, leasing companies, stock exchange investors, trading companies, and many other investors earning recurring taxable income in Poland.

Cyprus PICIS Structure:

Under this structure, a Private International Collective Investment Scheme (PICIS) is used to invest in a Polish JSP(s). An ICIS is an investment fund that may be incorporated in the form of a limited liability company. Once the ICIS forms a JSP together with a second partner (e.g. a subsidiary being a limited liability company) the foreign structure is in place. Pursuant to Polish commercial law, partnerships have no legal personality and are not deemed to be taxpayers for CIT purposes. Hence, it is each of the partners who are liable to income tax on the partnerships’ profits, not the partnership itself. As a result, partnership profits assigned to the PICIS are exempt from CIT in Poland.