Last Monday (October 31, 2016) turned out to be a black one for non-public investment funds in Poland (i.e. closed-end investment funds known as FIZAN).
There was uproar in the business environment and among tax advisors; many could not believe what they had heard. A group of MPs of the ruling party, Law and Justice (PiS), introduced to Parliament a draft amendment to the Personal Income Tax Act and the Corporate Income Tax Act.
Although at first glance concerned primarily with the personal tax allowance, the proposed amendments are in fact far more serious – if passed into law, they will (under the banner of fighting against aggressive tax optimization schemes) impose full corporate income taxation (CIT) on privately held investment funds in Poland with effect from January 1, 2017!
And this revolution required only four pages of legal act text.
Currently all income received by FIZAN is exempt from CIT. The revenue is taxed only at the level of investors (i.e. the certificate holders) and only at the moment a dividend is paid out. However, the income could also be returned to certificate holders through the redemption of their certificates. Where that is the case, the capital gain is taxable in the place of residence of the certificate holder (and so could be exempt from taxation or taxed at a very low rate). The overall result is that, depending on the circumstances, profits generated by FIZAN could benefit from full tax exemption. In addition, even where full exemption is not possible, any taxation of the income from investment could be deferred until the certificate holder realizes a gain on the redemption of certificates (i.e. the income profits could be rolled-up in the fund and converted into capital gain at the time of a disposal).
As a consequence of these advantageous characteristics, FIZAN became quite popular vehicles in the tax-efficient structuring of certain operational activities for various sectors of the Polish economy.
According to the Polish Financial Supervisory Authority, there were 724 closed-end investment funds registered in Poland at the end of the last year. This is 90% of all investment funds registered in Poland, including public funds. Their number increased in a year by more 20%. In 2015 they made approximately €2.8 billion tax-exempt profit. These numbers speak for themselves.
The ruling party is not wasting their time. The draft was introduced on October 31 and by November 4, Parliament were already working on it, with just one day of break for a bank holiday. Why the urgency, you might ask? Simply put, the government wants to catch the taxpayers, shut down the aggressive tax optimization schemes without giving them time to think up new schemes and restructure their affairs to avoid the charge. Another justification is that the government’s program of increased social spending needs funding.
There are less than three months left if the amendments are to enter into force on January 1, 2017. It must be considered that there is possible threat that the government will kill all investments, while aiming to target only to the aggressive tax optimization schemes. This would be akin to cutting off an entire arm immediately, instead of opting for precise surgery. Another reason for the planned amendments is the government’s program of increased spending on social expenditures, which needs funding.
This battle is uneven. The Ministry of Finance has a strong weapon in its hands, in the form of the general anti-avoidance rule (GAAR), which entered into force in July 2016. Any corporate restructuring may now be deemed to be aimed at tax avoidance and challenged.
We may also expect a plot twist in this story, like it happened in October 2016 with the retail tax, which was suspended after injunction by the EC, before it was ever collected. After Parliament session on November 4, the MPs are considering introducing “some amendments” in the proposed draft. We will find out the ending to this story by the end of the year; in particular, whether it has a happy ending or whether it was just a “trick or treat” for Halloween?!