On 27 February 2025, CJEU ruled in case C‑18/23, the decision being of extreme importance for Polish WHT exemption for foreign internally managed investment funds.
The Polish WHT exemption for foreign investment funds is subject to a number of conditions designed by reference to characteristics that are specific to Polish investment funds. CJEU's judgment is specifically concerned with the requirement that the foreign fund must be managed by an entity that conducts its business pursuant to an authorisation from the competent financial market supervisory authorities of the country where the entity has its registered office. This requirement ties in with the Polish investment fund and AIF management legislation which strictly forbids setting up internally managed funds (whether UCITS or AIF).
The above requirement leads to an issue because, under the applicable Luxembourg law, i.e. Gesetz über Spezialfonds / Loi relative aux fonds d’investissement spécialisés of 13 February 2007, specialised alternative investment funds may be managed internally. While the particular dispute before CJEU concerned an alternative investment fund, Luxembourg law (specifically, Gesetz vom 17. Dezember über Organismen für gemeinsame Anlagen) allows for internally managed fund structures also in the case of UCITS operating as SICAVs.
The same option is allowed under UCITS Directive.
The Polish tax authorities and lower-level administrative courts denied the exemption to internally managed foreign investment funds, arguing that internally managed investment funds cannot be considered comparable to Polish investment funds. They claim that the internal management of a fund is not "as such" authorized by competent financial supervision authorities. Consequently, since such a fund is managed by an entity that is not authorized by financial supervision authorities, the fund is not comparable to Polish investment funds.
But that approach was not the only one, as seen in a series of favourable Supreme Administrative Court (“SAC”) verdicts contesting the above interpretation, for example SAC judgments in cases II FSK 699/19 (judgment of 2 December 2021), II FSK 2965/18 (judgment of 1 December 2021), II FSK 2663/18 (judgment of 29 January 2021) and II FSK 1866/18 (judgment of 18 November 2020).
Despite that favourable line of authority, the Regional Administrative Court in Gliwice made an order on 28 November 2022 in case number I SA/Gl 942/22 to issue a reference for a preliminary ruling to the Court of Justice of the European Union in the case of a Luxembourg-based company that operates as a specialist investment fund (SIF-SICAV). The Polish court sought a resolution under Community law to the issue of whether the national law governing the applicability of exemption only to externally managed foreign funds is compatible with Article 63 TFEU.
Notwithstanding Advocate General Juliane Kokott's contrary opinion dated 11 July 2024, TSUE held that because Polish law only permits externally managed funds, Polish tax regulations are contrary to the principle of free movement of capital to the extent they provide that:
- only funds managed externally by an entity authorised by the competent financial market supervisory authorities may enjoy the corporation tax exemption in respect of income from investments made by such a fund; and
- such an exemption is not available to internally managed funds constituted in accordance with the legislation of another Member State.
The ratio and reasoning behind CJEU's ruling is as follows:
- A differentiation based on objective criteria may be a de facto violation of the principle of free movement of capital where it imposes a condition that is so specific to the national market that it will always be satisfied by domestic funds and only foreign funds are at risk of being unable to satisfy it.
- The comparability of a cross-border situation with an internal situation must be examined having regard to the aim pursued by the national provisions at issue as well as to the purpose and content of those provisions. In the case at hand:
- The purpose of the provisions at issue is to grant tax exemption with respect to the income of undertakings which carry out specific activities subject to the supervision of the competent financial market supervisory authorities;
- Polish government asserted that the objective of requiring external management is to limit investment risk;
- According to CJEU, for the purpose of assessing whether the level of investment risk according to fund management form reflects an objective difference to justify the different tax treatment of internally vs. externally managed funds, it is necessary to determine the objective of the subject exemption;
- Next, assuming that the Polish exemption is intended to avoid double taxation of investment income and to treat investments carried out through a fund in the same way as direct investments for tax purposes, the court held that, in the context of the purpose of the applicable tax regulation, the fact that a fund is managed internally does not necessarily place it in a different situation to that of an externally managed one.
The judgment is doubtlessly favourable for internally managed investment funds.
What is more, the case offers more universal guidelines that can prove helpful in other configurations where a legal regulation relies on what prima facie appears to be objective criteria.
Accordingly, it is worth having a closer look to see if a given national law perhaps violates the principle of free movement of capital indirectly. This will require taking into account the purpose of the tax regulation in issue and engaging in functional construal of the framework provisions on the setting up and operation of investment funds, whether in the country of source or the country of establishment.
For example, for a long time Poland was the forum of a dispute on whether national tax exemptions are available to foreign funds without legal personhood, given that all national funds are legal persons. This dispute was resolved in favour of the funds.
Also, in case C-342/20, CJEU challenged Finnish regulations granting preferential tax treatment solely to contractual funds and denying it to foreign fiscally-transparent statute-based AIFs where only Finnish funds could be constituted solely in accordance with contract law, holding that this is a restriction of the free movement of capital.
In cases C-478/19 and C-479/19, CJEU held that free movement of capital was restricted by Italian law which granted preferential tax treatment solely to close-ended real estate funds even though in other jurisdictions, e.g. in Germany, real estate funds are open-ended.
In the case with which this newsletter is concerned, the referring court is yet to reach its verdict. However, given the ratio behind CJEU's judgment, it is unlikely for the Polish court to make any decision other than to reverse the unfavourable ruling of the Polish tax authority.
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