SIGNIFICANT TAX PLANNING OPPORTUNITY FOR INVESTMENT IN POLAND
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 limited liability company (LTD) with a minimum share capital of PLN 5,000. The 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 JSP can be covered by the LTD (1%) and 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 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 (KNF);
- Agreement with TFI, depository bank, valuators, auditors;
- Cost / Benefit analysis.
- Transfer of assets to CIF.
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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.
Taxation of Cyprus PICIS
Like all corporate entities with limited liability, it is exempt from profits from distributions received from the JSP on the basis that the JSP constitutes a Permanent Establishment (PE) in Poland. Moreover, the JPSs profits are exempt from Polish CIT as indicated above.
If the Cypriot ICIS meets specific requirements prescribed by Polish CIT law, it may be fully exempt from CIT in Poland. The requirements for an international ICIS to qualify for the Polish exemption are summarized as follows:
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The ICIS must be subject to income tax in the country it is established, specifically all income, regardless of where such income is earned; |
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The sole object of the ICIS must be the collective investment of funds, obtained by way of public and private offering of its participation units, in securities, money market instruments and other property rights; |
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The ICIS must carry out its activities based on a license granted by the competent authority in the state of establishment; |
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The activities of the ICIS are supervised by the competent authorities of the state of establishment; |
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The ICIS must have a depositary provider for safe-keeping of assets; |
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The country of establishment must have in place a legal basis for exchange of tax information between the relevant tax authorities, arising from a double taxation agreement or other ratified international agreement to which Poland is party to; |
| 7. | Appointment of an authorised Investment Manager who will manage the fund. |
It should be noted that the Cyprus PICIS satisfies all of the above requirements regarding the Polish CIT exemption.
In summary, the profits allocated to an ICIS are fully exempt from Polish CIT as well as profits generated from the alienation of securities.
It is worth emphasizing that the maintenance costs of the investment fund in Cyprus are significantly lower than in Poland (i.e. CIF) and other foreign jurisdictions such as Luxembourg, Ireland and Malta.
Cyprus PICIS Considerations:
- The number of investors is set to a maximum of 100;
- The minimum investment of each investor is EUR 50,000;
- Should obtain specific rulings from the Polish Ministry of Finance;
- Must ensure compliance with Polish and Cypriot tax laws;
- Must ensure effective management and control in Cyprus;
- Must ensure proper substance in place at the Cyprus level.
We would like to highlight Savva & Associates’ experience and expertise regarding PICIS services, namely the following:
1. Savva & Associates was the first service provider to successfully obtain a PICIS license on behalf of Polish clients investing in JSP entities;
2. We are among the few providers to have obtained a positive tax ruling in Cyprus confirming exemption from tax regarding a PICIS holding JSP investments;
3. We have successfully negotiated attractive custodian fees with Cypriot banks;
4. We offer the most competitive PICIS related fees in Cyprus.
If you would like further information regarding structuring investment into Poland, please do not hesitate to contact Charles Savva at c.savva@savvacyprus.com
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The country of establishment must have in place a legal basis for exchange of tax information between the relevant tax authorities, arising from a double taxation agreement or other ratified international agreement to which Poland is party to. |
It should be noted that the Cyprus PICIS does in fact satisfy all of the above requirements for qualification of the Polish CIT exemption.
In summary, the profits allocated to an ICIS are exempt from Polish CIT and it must be noted that under the Polish CIT law, an ICIS is fully exempt from taxation of trading profits, as well as profits generated from the alienation of securities.
It is worth emphasizing that the maintenance costs of the investment fund in Cyprus are significantly lower than in Poland (i.e. CIF) and other foreign jurisdictions such as Luxembourg, Ireland and Malta.
Cyprus PICIS Considerations:
§ The number of investors is set to a maximum of 100;
§ The minimum investment of each investor is EUR 50,000;
§ Should obtain specific rulings from the Polish Ministry of Finance;
§ Must ensure compliance with Polish and Cypriot tax laws;
§ Must ensure effective management in Cyprus;
§ Must ensure proper substance in place at the Cyprus level.
We would like to highlight Savva & Associates’ experience and expertise regarding PICIS services. We specifically would like to highlight to you the following:
1. Savva & Associates was the first service provider to successfully obtain a PICIS license on behalf of Polish clients;
2. We are among the few firms to have obtained a positive tax ruling in Cyprus regarding exemption from tax of a PICIS holding JSP investments;
3. We have successfully negotiated attractive custodian fees with Cypriot banks;
4. We offer the most competitive PICIS related fees in Cyprus.
If you would like further information regarding structuring investment into Poland, please do not hesitate to contact Charles Savva at c.savva@savvacyprus.com
