Double taxation of alternative investment companies repealed as of 1 January 2019

Elimination, effective 1 January 2019, of double taxation of alternative investment companies may translate into strong impetus for growth of venture capital investments in Poland.

What are alternative investment companies ?

The legal construct of the alternative investment company was introduced to Polish law in mid-2016 within the context of implementation of the AIFMD Directive.

The legislature devised alternative investment companies as a form for collective investment (first and foremost in the equity markets), one which is simpler than the typical investment fund (whether closed or open-ended) and better suited for smaller investments. As opposed to a typical investment fund, an alternative investment company may be incorporated as a limited liability company or a joint stock company, or even as a limited partnership or a partnership limited by shares, with the investors taking up shares in this entity. Accordingly, day-to-day operations of an alternative investment company are regulated by the Commercial Companies and Partnerships Code. In this way, the mode of operation of the investment vehicle is more, as it were, user-friendly from the perspective of the typical investor – always subject, of course, to any detailed laws applicable to specific investment activity.

Even more importantly, given their small size, alternative investment companies could benefit from an establishment regime simpler than that applicable to “standard” investment funds. While all alternative investment company managers are subject to Polish Financial Supervision Authority (KNF) oversight, creation of an alternative investment company by an entity with not more than PLN 100,000,000 (or, in some cases, EUR 500,000,000) under management does not require clearance by the KNF, only entry in a register maintained by it. Alternative investment company managers of this class also are not bound by many of the regulatory requirements applicable to “regular” investment funds, for instance as regards internal audit or cooperation with a depository, making them a more agile and less costly investment vehicle.

CIT exemption for alternative investment company earnings from an investment exit 

Yet, until now, the alternative investment company form was not especially popular among investors. This lacklustre take-up was caused, among other factors, by the tax aspect – income from such a company’s investments was subject to taxation on general terms already at company level, before distribution among the investors, which left the latter with lower returns. It appears that many managers and investors viewed this as a disadvantage of alternative investment companies, motivating them to commit their money elsewhere, including vehicles incorporated in foreign jurisdictions, so that they might benefit from more favourable tax treatment.

This problem was not lost on the Polish legislature which, effective 1 January 2019, introduced to the CIT Act an exemption for income (revenue) accruing to alternative investment companies from sale of shares in another company (art. 17.1.58a of the CIT Act). In order to qualify for this exemption, the alternative investment company must fulfil two prerequisites:

1. Prior to the sale, the alternative investment company must directly hold not less than 10% of the shares in the company whose shares are being sold, and
2. The alternative investment company must have held those shares for at least two years.

At the same time, the legislature has specified certain circumstances in which this general exemption will not apply (art. 17.10b of the CIT Act). Specifically, no exemption will apply to income (revenue) achieved by an alternative investment company from sale of shares in an entity whose assets, whether directly or indirectly, comprised real property in Poland (or rights in such property) to at least 50% of such entity’s total asset value.

An interesting alternative

Thanks to the tax changes outlined above, alternative investment companies finally stand a chance of becoming an attractive option in actual practice. The tax exemption for investment exits newly introduced in Polish law is in line with solutions successfully applied in other jurisdictions (e.g. Luxembourg), and one would hope that it will contribute to development of the Polish investment ecosystem. This development also improves the prospects for alternative investment companies currently benefiting from public programmes for indirect support to innovative companies in the early stages of their development, in particular BRIdge Alfa and Starter FIZ.