Application of Guidelines to payments to investment funds

The tax Guidelines published by the Ministry of Finance concerning the application of the so-called beneficial owner clause for withholding tax purposes (hereinafter: Guidelines) are intended to clarify the rules for applying this clause in the context of the withholding tax collection obligation.

One of the issues that has raised doubts in the past was the possibility of applying tax preferences to payments made to foreign investment funds.

Tax preferences available to foreign investment funds

Under the current legal framework, foreign investment funds earning income in Poland may be entitled to:

1. 1. tax exemption included in CIT Act and addressed to certain types of foreign investment funds (the so-called fund exemption),
   2. reduced withholding tax rates or exemptions under double taxation agreements (DTA),
   3. participation exemptions included in CIT Act concerning dividends, interest, and royalties, being the implementation of relevant EU directives.

Each of these exemptions has specific conditions, and their application in a given case requires detailed analysis.

From the perspective of the Guidelines, the key exemptions and reduced tax rates are those which require the recipient of the receivables to be their actual owner.

Investment fund and actual economic activity

The Guidelines specify the requirements regarding the assets and personnel of the recipient (business substance) of the receivables that must be met in order for a given entity to be considered the actual owner and thus be able to benefit from tax preferences.

This is important because tax authorities sometimes question the status of an investment fund as the actual owner of an income, stating that the investment fund does not have sufficient business substance to claim that it carries out actual business activity.

The Guidelines indicate that the level of assets and personnel may be lower for investment companies than for operating ones. However, it should be remembered that certain requirements must still be met, in particular the fund must have an office and qualified personnel to enable it to conduct its activities.

The specific nature of investment funds’ activities lies in managing financial assets with relatively little involvement of their own funds. Funds often outsource many functions, such as their registered office, accounting, and IT services. All this is usually provided by external entities, often under an agreement with the investment fund manager. However, this does not mean that investment funds do not conduct actual business activities. It is important to note the reservation in the Guidelines that the conduct of “actual business activities” will be determined not so much by the legal form of the right to use the office (ownership, lease, tenancy, etc.) or the employment of employees (employment contract, contract of mandate, so-called global mobility agreement, etc.), but rather the fact that the entity is charged with their costs to an extent that justifies the assumption that decisions made within such an entity in relation to the receivable in question are made on its behalf (for its benefit).

Is the investment nature of the fund a problem?

Furthermore, investment funds are often claimed as not being the beneficial owners of their income , precisely because of their investment nature, i.e., they do not generate income for their own benefit. It is hard to argue with such opinions. Every corporate entity acts in the interests of its owners – shareholders, investors. Nevertheless, acting in the interests of the owners primarily means acting in one’s own interests, i.e., achieving one’s own benefits. An investment fund is, by definition, a collective investment vehicle, which means that it collects funds from investors in order to invest those funds, acts with particular regard to the interests of those investors, and aims to generate profit. However, before any profit can be paid out to investors, the fund must look after its own business. It can be ventured that, from the perspective of its objectives, an investment fund differs from a company owning a factory only in the subject of its investments – the fund’s investments are primarily investments in financial markets, which means that the fund itself, as indicated above, has limited needs in terms of fixed assets, offices, equipment, or employees.

From this perspective, the guidance provided in the Guidelines, which defines when it is possible to speak of “obtaining one’s own benefit” from receivables, will be important. The Guidelines interpret this as the absence of an absolute obligation to reinvest the receivables received. If, as part of its business activities, an entity has the actual possibility of using a given receivable for its own benefit, bears the risk of losing that receivable, and has resources created from such receivables that allow for the ongoing operation of the entity, the coverage of liabilities, and the securing of business activities, then that entity should be considered the actual owner. This classification will not be changed by the fact that the payment received is not reinvested but allocated to payments to shareholders. The activities of investment funds should be assessed in a similar manner.