It is becoming increasingly clear that the legislature is striving to make Poland a technological and digital oasis. One of the tools intended to achieve this goal is a tax exemption applicable to venture capital funds.
This year, the government announced its Responsible Development Plan, a set of tools aiming to boost innovation and improve Polish competitiveness on the international stage, as well as Start in Poland, a program to involve state-owned companies in financing Polish startups and promote Polish tech innovation.
These are all signs of a strong pro-innovation trend, underpinned by the Act of 25 September 2015 on the Amendment to Certain Acts in relation to the Support of Innovation. Under this Act, a number of tax relief measures concerning research and development activities have been introduced, among them a tax exemption for venture funds. This exemption concerns income from the disposal of shares (stocks) in companies conducting research and development activities and may turn out to be an additional investment incentive for investors.
What is the essence of the tax benefit?
The tax preference applies to the income of venture funds from the disposal of shares (stocks) purchased in the years 2016 - 2017. Where the requirements provided for by the Act are met, this income will enjoy a total exemption from corporate income tax. Consequently, if a venture capital fund meets the requirements for enjoying the exemption, it may gain as much as 19 percent profit on the sale of shares (stocks). Of course, the higher the return on an investment, the greater the tax benefit will be. In the event of a large increase in the value of shares or stocks, the amount of savings may be considerable, which is illustrated by the table below:
Click here to view table
Exemption is not applicable to all funds
As stated above, in order to be able to take advantage of the exemption, a number of conditions must be met. One set of conditions concerns the venture capital fund, while another set concerns the target (i.e. the company whose shares are being purchased). The third set comprises conditions relating to the investment period and the level of engagement.
The preference is time-limited; the exemption applies only to shares purchased in 2016 and 2017. What is important is that the date of divestment is of no relevance; however, the minimum two-year investment period and the minimum 10% share in the portfolio company (the target) must be maintained.
Conditions to be met by a venture capital fund
First of all, it is necessary that the venture capital fund operates in the form of a capital company or a limited joint-stock partnership. No registration in a specific register is required for the company to conduct its business activities for the relevant time. Therefore, it is possible (and, in practice, it often happens) that a separate venture capital company may be created for the purpose of a particular investment.
In addition, in order to take advantage of the exemption, a venture fund has to conduct its business activity in the area of financial investments only, and the company should, among other things, invest 75 percent of the balance-sheet value of its assets in assets other than:
- securities issued in an initial public offer or admitted to trading on the regulated market (unless upon their purchase, the nature of the securities was different)
- money market instruments (e.g. interbank deposits, money bills and treasury bills, derivative transactions), unless they have been issued by non-public companies whose securities are not admitted to trading on the regulated market or whose stocks or shares make up an investment portfolio of a non-public company
- real properties.
Also, the value of the assets in which a venture fund may invest may not exceed €50 million according to their purchase price.
Conditions to be met by a portfolio company
A portfolio company (the target) may not have the status of a controlled company (i.e. it may not be a foreign company to which the provisions relating to so-called controlled foreign corporations apply). Such a company may not conduct any trade activity and, most importantly, it must conduct research and development activity. Please note that the exemption applies both in the case of investment in companies from Poland as well as from other countries of the European Union and the European Economic Area.
Exemption for a few?
The exemption described above is definitely an advantageous option for venture funds. However, due to the imposed conditions, it will not be applicable on a broader scale. First, this is because the legislature did not provide for the exemption directly in the Act on Corporate Income Tax, but instead in the above-mentioned Act on supporting innovative activities – as a consequence, it is relatively unknown. Also, surprisingly, the application of the exemption is limited to shares (stocks) purchased in the years 2016 - 2017. Many observers have remarked that programs aiming to foster innovation should cover a period longer than two years in order to be effective. Also, the exemption is burdened with conditions that might be difficult to meet in practice, especially for funds with highly diversified portfolios.