CIT-free income of ASI

The Corporate Income Tax Act provides for a number of exemptions from having to pay CIT on earned income. As of June 2022, this exemption also covers the income (revenue) of alternative investment companies implementing the financial instrument earned in the tax year from capital gains made in connection with the implementation of the financial instrument in the part that increases the financial contribution from programmes to implement the partnership agreement. At first glance, this whole construction sounds rather enigmatic. In order to understand it better, it is necessary to clarify the purpose of the above regulation and the statutory definitions introduced in connection with this change.

Amendment to the CIT Act

The aforementioned tax exemption for ASI was introduced by the Act of 28 April 2022 on the Principles of Implementation of Tasks Financed from European Funds in the Financial Perspective 2021-2027. The purpose of this Act is to define comprehensive implementation solutions dedicated to the management of cohesion policy programmes described in the so-called Partnership Agreement – the strategy agreed by Poland with the European Commission for the use of European Funds in the next decade.

ASI implementing the financial instrument

The Act on the Principles of Implementation of Tasks Financed from European Funds in the Financial Perspective 2021-2027 introduced the definition of an alternative investment company implementing a financial instrument into the CIT Act.According to this definition, it is an ASI through which the entity implementing the financial instrument implements the financial instrument by making a cash contribution to the company. An entity implementing a financial instrument is a Polish institution responsible for the management of EU funds, which can provide a financial contribution from the programme funds for financial instruments. A financial instrument, in turn, is any form of support provided under a structure through which financial products are delivered to final recipients. Simplifying the above vague and ambiguous definitions, it can be said that an ASI implementing a financial instrument is an ASI in which a Polish institution has invested financial resources from the European Funds.

CIT exemption

Not all income (revenue) of an ASI in which a domestic entity with funds from European Funds has invested its funds is exempt from CIT. The mere investment of funds by a domestic investor does not relieve ASI from the obligation to pay CIT on the capital gains income earned to date. This provision limits the exemption only to income (revenue) that ASI has derived from capital gains earned on an investment co-financed with funds invested by a domestic investor. Hence, other ASI investments that were not co-financed by a domestic investor do not benefit from this exemption.

Significantly, the new regulation does not provide for any quantitative or temporal restrictions on tax-exempt investment gains. Thus, it differs from Article 17(1)(58a) of the CIT Act, which provides that the income (revenue) of alternative investment companies obtained in a tax year from the disposal of shares (stocks) is exempt from CIT, provided that the alternative investment company which disposes of the shares (stocks) directly held, prior to the date of disposal, not less than 5% of the shares (stocks) in the capital of the company whose shares (stocks) are disposed of, for an uninterrupted period of two years.

The legislator decided not to limit in any way the investments of ASIs in which a domestic investor has a stake. Pursuant to Article 17(1)(58b) of the CIT Act, it is irrelevant both what percentage of shares (stocks) the ASI purchases and the period for which the ASI holds its assets. It is solely up to the ASI and the domestic investor to regulate these issues.

Summary

This change should be viewed positively, as it provides a great incentive for ASIs to take advantage of the funding offered by European Union-funded programmes. The investment of a national investor with European Funds in an alternative investment company has two main benefits for the company. The first is the possibility of raising a large amount of capital from a single entity, so that it is not necessary to look for a whole group of investors who would like to place their funds in an ASI. The second is the CIT exemption discussed in this article. Under such cooperation, the ASI obtains the capital necessary for the investment and the profits made in connection with this investment are exempt from CIT. However, such a solution also has its drawbacks, as the rule is that the cash contribution to the ASI by a domestic investor precedes the need for the ASI to meet a number of requirements and adapt its operations to European standards. The profit and loss account suggests that this is a worthwhile gamble.

It should be noted that the absence of a domestic investor’s capital share in the assets of an ASI does not completely deprive it of the possibility to exempt its income from CIT. Alternatively, the aforementioned Article 17(1)(58a) remains in place, which, despite specific timing and quantitative investment requirements, allows ASI to retain a large portion of its profits. While these requirements undoubtedly force ASIs to invest their assets in a more considered and long-term manner, they also have tangible benefits.