By a judgment of March 11, 2016 (case file no. III SA/Wa 2732/15), the Provincial Administrative Court (“WSA”) confirmed that earnings of a foreign fund are not eligible for a CIT exemption if the fund is co-managed by a managing company and a board consisting of natural persons.
In its application for a tax ruling, the Company explained that a Cypriot special vehicle managed by a board consisting of natural persons (and eligible for private investment fund status (“PICIS”)) was going to become its majority shareholder in the future. PISIC was also going to appoint an independent investment manager in the form of a Cypriot investment firm having its registered office in and duly licensed in Cyprus to manage PICIS assets and business, such manager to approve certain material decisions regarding the PICIS before they are implemented. The Company also explained that to have PICIS status and the status of an investment firm, relevant permits must be procured from the Cypriot Securities Commission.
In connection with the foregoing, the Company enquired whether a Cypriot investment fund with PICIS status was exempt from CIT under Art. 6(1)(10a) of the Polish CIT Act, i.e. exemption for ‘co-financing entities’. The Tax Office Director’s reply to the enquiry was negative and he stated that a PICIS cannot avail itself of the exemption because it does not fulfil one of the premises in that the proposed management system does not allow the assumption that the PICIS will be managed by an entity duly licensed by the relevant financial regulator of the country of its registered office.
As a result of an appeal filed by the Company, WSA ruled that considering that in the description of a future event the Company stated that the PICIS would be in practice effectively managed by a licensed manager, the aforesaid premise must be assumed to be fulfilled.
The Tax Office Director appealed against the WSA judgment to the Supreme Administrative Court (“NSA”) which granted the last resort appeal. In consequence, the case was remanded to WSA, which ultimately ruled that considering that in the case at issue the PICIS was co-managed by an investment firm and by private individuals sitting on its board, all of these entities must fulfil the aforesaid premise as they co-manage the PICIS. Consequently, it cannot be assumed that a PICIS managed in this manner is eligible for the tax exemption because natural persons cannot have a “registered office” (as they only can have “a residential address or a business address”) in the country whose relevant financial regulator licensed it to manage funds.
At the outset, we need to note that the problem at issue concerns the method of managing foreign co-financing institutions and has already been resolved at the NSA level. Unlike in the case of the other judgment, NSA, in its judgment of July 24, 2015 (case file no. II FSK 1455/13), ruled that a fund (including those with PICIS status) is eligible for CIT exemption even if the management is delegated to a managing firm.
For this reason we cannot agree with WSA’s conclusions, as the provincial court ignored the fact that the management board of the PICIS delegated its right to manage the fund to an investment firm. As a result, the investment firm is the managing company of PICIS, not the private individuals, and consequently only the status of the investment firm ought to be taken into account to assess whether the PICIS is eligible to the CIT exemption. The WSA judgment consequently unlawfully restricts the fund’s right to the exemption under Art. 6(1)(10a) of the CIT Act.
The judgment at issue is also testament to the fact that although this exemption has been in effect for over four years, the courts seem to have an inconsistent stance on this matter. For this reason we recommend that each fund structure be analyzed in detail, especially as the exemption may depend on compliance with foreign regulations.