Alternative Funds 2019 Comparisons

Last Updated October 14, 2019

Law and Practice

Authors



Hogan Lovells LLP (Warsaw) LLP is one of the largest law firms in the world, with over 2,500 lawyers working in over 50 offices in 26 countries on six continents. Hogan Lovells is one of the top law firms in Poland and provides comprehensive legal and tax services. The global private equity team at Hogan Lovells has extensive experience advising private equity sponsors and investment funds on their investments and co-investments. Its fund clients include alternative and multistrategy asset managers such as pension funds and sovereign wealth funds. The firm advise its clients on the investment process from fund formation, through buy-out and portfolio management to exit, regularly counselling investors on sectors such as real estate, business services, consumer and retail, transport and logistics, industrials, automotive, and chemicals. The team provides also regulatory insight needed for the formation, and operation of investment funds, including alternative investment funds.

Poland is a reasonable location for alternative investment funds (AIFs), managers and investors, due to its membership of the EU and its growing economy; GDP growth reached 5.1% in 2018. According to the data gathered by the National Bank of Poland (NBP), at the end of the second quarter of 2019 there were 625 closed-ended investment funds (FIZs) and 51 specialised open-ended investment funds (SFIOs). In addition, there were 60 investment fund companies (TFIs) entitled to establish and manage investment funds.

Moreover, according to the register of managers of alternative investment companies carried by the Polish Financial Supervision Authority (Komisja Nadzoru Finansowego – PFSA), as of 29 August 2019, there are currently 159 alternative investment companies (ASIs) managed by 98 internal ASI managers and 39 external ASI managers. AIFs in business and investment operations in Poland are used by both domestic and international investors. AIFs are managed by TFIs, external and internal ASI managers and specialised management teams. The legal act which governs the establishment and operations of AIFs is the Act on Investment Funds and Management of Alternative Investment Funds of 27 May 2004 (Act on Investment Funds). AIFs are also subject to directly applicable provisions of EU law.

There are three principal types of AIFs, which may be established in Poland:

  • SFIO;
  • FIZ;
  • ASI.

An SFIO is an investment fund governed by provisions of the Act on Investment Funds relating to Open-Ended Investment Funds (FIO) with specific differences. Generally speaking, an SFIO is more flexible than an FIO, because it may impose in its statute restrictions on its investors in respect of their type (eg, only natural persons and/or only legal entities) and/or minimal amount of investment (eg, one-off payment to the SFIO accounting for at least EUR40,000 in relation to natural persons). Generally, an SFIO's investment policy is comparable to the investment policy of an FIO. However, if the statute of an SFIO provides specific investor limitations, the SFIO may apply the investment limits and rules of a FIZ, which are less strict. An SFIO issues participation units, which cannot be transferred onto third parties, but are subject to redemption at the request of unit-holders, inheritance and/or pledge. Only a TFI is legally entitled to establish an SFIO.

Another type of AIF is a FIZ and from the outset it has more liberal investment limitations than an SFIO, but is also subject to wider disclosure requirements. It issues investment certificates, which are deemed as securities, which legal definition is provided for in Article 3 item 1a) of the Financial Instruments Trading Act of 29 July 2005. For this reason, they are transferable onto third parties and are subject to inheritance and/or pledge. Investment certificates may be also offered through public offering and/or listed on a regulated market or multilateral trading facility. Similarly as in case of an SFIO, a FIZ also may be established only by a TFI.

There are various specific types of investment funds, which may be established on the structure of an SFIO or a FIZ. A money market fund (established on the basis of an SFIO) invests only in money market instruments and specific deposits. A portfolio fund (established on the basis of a FIZ) is a fund, which investment portfolio may be structured in the form of (i) an index portfolio (based on a portfolio of securities on the basis of which a regulated market index is determined) or (ii) a benchmark portfolio (a portfolio the composition of which is determined in the fund's statute not based on the index referred to in the item (i) above.

Furthermore, a FIZ can be also established as a securitisation fund, which acquires receivables. In addition, both an SFIO which invests according to FIZ investment rules and a FIZ may be established as a non-public assets fund, which invests at least 80% of its assets in assets other than securities offered to the public by way of a public offering or admitted to trading on a regulated market or money market instruments.

As mentioned above, the definition of an AIF covers also an ASI, which is an investment vehicle in the form of a capital company (limited liability company, joint-stock company, including European company – societas europea) or a limited partnership, limited joint-stock partnership where the only general partner is a capital company or European company. The operations of an ASI may involve only gathering assets from many investors for the purpose of investing it in their interest in accordance with a given investment policy, subject to the exceptions provided by the Act on Investment Funds. An ASI can be managed internally or externally by ASI managers.

On the top of fund structures is a TFI, which is generally responsible for establishment and management of an SFIO and/or a FIZ. It must be established as a joint-stock company with its registered seat in the territory of Poland and is subject to licensing procedures before the PFSA. The Act on Investment Funds stipulates which activities may be performed by a TFI, in particular:

  • establishment and management of funds;
  • management of portfolios including one or more financial instruments;
  • investment advisory services.

The scope of activities of each TFI depends on the scope of the licence issued by the PFSA. In terms of regulatory requirements imposed on TFIs, among others, a TFI is compelled to have minimum initial capital accounting for at least the Polish zloty (PLN) equivalent of EUR125,000, or EUR 730,000 in case of management of portfolios, which include one or more financial instruments. In addition, it is obliged to comply with specific requirements in respect of own funds, described in the Act on Investment Funds. A TFI management board should be composed of at least two members. Each TFI management board member must fulfil the requirements set forth in the Act on Investment Funds (including the "good reputation" requirement).

Both an SFIO and a FIZ are legal entities established, governed and represented by a TFI. Even though a TFI is the governing body of an SFIO and a FIZ, these entities are formally separate. This is reflected by the rules of liability of an SFIO and a FIZ, because they are not liable for any obligations of a TFI, nor damage resulting from the non-performance or improper performance of a TFI's obligations. It should be noted that such structure still relates to specific legal risks. A TFI which represents an SFIO or a FIZ is entitled to represent it and incur debts on its behalf. In case of improper performance or non-performance of a TFI's obligations, investors may claim damages against a TFI. In order to mitigate that risk, some investors set up their own TFI.

SFIOs and FIZs also willingly use special purpose vehicles (SPVs) in their investment structures. More detailed information about SPVs and their application in investment structures may be found in 2.13 Use of Subsidiaries for Investment Purposes.

In relation to an ASI, its structure may be organised in two different ways. If an ASI is established as a capital company, its manager may only be a capital company, which operates as internal ASI manager. In case of an ASI established as a limited partnership or limited joint-stock partnership where the only general partner is a capital company, its manager may only be a capital company being the general partner of an ASI, operating as an external ASI manager.

In Poland a capital company means a limited liability company and a joint-stock company, therefore an ASI manager can only be established in one of such legal forms. An ASI manager is entitled solely to manage an ASI, including marketing, managing an EU AIF and marketing of such an EU AIF. Initial capital of an internal ASI manager shall account for at least EUR300,000, or at least EUR125,000 in the case of an external ASI manager. In addition, an ASI manager is also obliged to comply with specific requirements in respect of own funds. Moreover, it needs to be registered in the territory of Poland and its management body board must of at least two members. Management board members in an ASI must fulfil the same requirements as management board members in a TFI.

As previously mentioned, the Act on Investment Funds governs the establishment and operations of AIFs. This act implements the Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers, amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (AIFMD), and is supplemented by various executive regulations in the form of ordinances issued by relevant ministers. Moreover, AIFs are subject to directly applicable provisions of EU law.

Provisions of law stipulate investment limitations of an AIF, which depend on the general type of AIF and also its specific type – both are described in 2.1 Types of Alternative Funds. Limitations may relate to classes of assets in which an AIF is entitled to invest or to permissible exposure limits. The Act on Investment Funds also stipulates prohibited activities, which cannot be performed by some AIFs.

An SFIO which invests according to FIO investment rules may invest only in the specified classes of assets described in the provisions of the Act on Investment Funds (eg, securities issued or guaranteed by the State Treasury or the NBP, securities and money market instruments offered to the public). Such an SFIO is subject to exposure limits – for instance, it cannot invest more than 5% of its assets in securities or money market instruments issued by a single entity or more than 20% of its assets in deposits of a single domestic bank or credit institution. Moreover, there are strictly prohibited activities, which cannot be performed by such an SFIO, such as short selling or acquisition of securities or transferable property rights, which represent the rights to precious metals.

As mentioned above, a FIZ has more liberal investment limitations than an SFIO. A FIZ is able to invest in transferable assets: securities; specific receivables; shares of limited liability companies; currencies; derivative instruments; property rights, which price depends directly or indirectly on the specified tangible property, specified types of energy, measures of and limits on production volumes or pollution allowances, which are admitted to trading on commodity exchanges; money market instruments.

Additionally, a FIZ may also invest in deposits of domestic banks, foreign banks and credit institutions, participation units, investment certificates, real estate, sea-going vessels or perpetual usufruct (a specific type of right in Polish jurisdiction similar to ownership right, subject to specific limitations). A FIZ is still subject to specific exposure limits – for instance, it is not entitled to invest more than 25% of its assets in mortgage bonds issued by a single mortgage bank. Foreign currency of a single country cannot account for more than 20% of FIZ assets. The same rules apply to an SFIO which invests in line with a FIZ investment rules.

In addition, each TFI needs to ensure that AIF exposures, in case of each type of AIF, do not exceeds the AIF exposure limits specified in the existing procedures at the relevant TFI. The value of AIF exposures should be calculated separately for each SFIO and FIZ, on each business day and at least once a day.

The provisions of law do not impose any limitations regarding investment strategy or exposure limits in relation to an ASI. The investment policy and investment strategies are determined in the instruments of incorporation of an ASI and in other documents, including regulations adopted by an ASI manager. Such documents may establish specific limitations.

Generally, there are two types of loans which may be originated by some AIFs: securities or money. The sole possibility to originate them depends on the type of loan, the type of AIF and its investment policy.

In relation to an SFIO, which invests according to FIO investment rules, it may loan dematerialised securities by a method described in Article 102 Section 1 of the Act on Investment Funds. Such loans may be originated upon conditions that the fund is provided with appropriate collateral (eg, in cash, specified securities or property rights), the collateral's value is equal to at least the value of the loaned securities on each day of valuation of the fund's assets and loans are originated for a period not exceeding 12 months. Furthermore, the total value of the loaned securities cannot exceed 30% of the SFIO's net asset value. In addition, the total value of the loaned securities and securities of the same issuer held in the SFIO's portfolio cannot exceed the exposure limits stated in specific provisions of the Act on Investment Funds.

A FIZ is able to originate both securities and money, but is subject to exposure limits stated in the Act on Investment Funds. The total value of the loaned securities and securities of the same issuer held in the investment portfolio of a FIZ cannot exceed 20% of the FIZ's assets in respect of a single entity and 25% of those assets in case of a mortgage bank. If an SFIO invests according to FIZ investment rules, it may originate securities and money in the same way and being subject to the same limits as a FIZ.

Provisions of law do not regulate loan origination in relation to an ASI. However, loan origination of an ASI may be treated as part of the investment policy and investment strategies in the documents of incorporation and in other documents. Such documents may impose specific limitations, as mentioned above.

In the Polish legal system there is no legal definition of cryptocurrencies, although the PFSA indicate that trading in cryptocurrencies is generally possible from the perspective of Polish law (subject to specific restrictions).  It is also important to note that the PFSA and NBP issued a joint position regarding the potential risk of investments made in cryptocurrencies. Taking the above into account, it may be said that they have doubts about investments in such assets.

The Polish market has some history in terms of investments made in non-traditional assets, because there were and still are some AIFs which invested in art, wine or other non-traditional assets.

The establishment of an AIF is subject to strict regulatory approval process. An AIF can be established if certain conditions are met:

  • adoption of the statute of the AIF;
  • conclusion of an agreement for depositary functions for the AIF by the TFI and the depositary;
  • obtaining authorisation from the PFSA;
  • collection of payments to the AIF in the amount specified in the AIF's statute;
  • entering the fund in the register of investment funds.

Obtaining authorisation from the PFSA is required during the process of establishment of both an SFIO and a FIZ. However, in relation to a FIZ, which issues only investment certificates and, according to its statute, those are not to be offered to the public, or admitted to trading on a regulated market, or introduced to trading on an multilateral trading facility, then it is not required to obtain authorisation from the PFSA.

In order to obtain authorisation, it is required to submit the motion to the PFSA. The motion needs to be supplemented by various documents, including:

  • the AIF's statute;
  • the agreement with a depositary on depositary functions for the AIF;
  • the AIF's prospectus and key investor information;
  • specific information for the AIF's clients.

There is no specific regulatory approval process of an ASI in Polish law. However, all ASIs need to be registered in the relevant registry court. The situation differs in relation to ASI managers. In order to conduct operations, ASI managers are subject to the regulatory approval process, but only in case they exceed certain thresholds relating to the amount of assets under management. If the total value of assets falling within the investment portfolios of ASIs which the ASI manager already manages (or intends to manage) does not exceed the PLN equivalent of EUR100 million, or if the ASI manager manages only the companies which do not apply the AIF financial leverage and whose rights of participation may be repurchased after at least five years from the date of their acquisition for the PLN equivalent of EUR500 million, the ASI manager may operate on the basis of an entry in the register of ASI managers.

An ASI manager which exceeds the threshold referred to above needs to submit the relevant application to the PFSA. In case of an internal manager, the application is submitted by a company (such as a limited liability company) in organisation. In respect to an external manager, the application is filed by a company, which is to be a general partner to an ASI, in accordance with its memorandum or articles of association, before such ASI is filed with a registration court. The motion will be accompanied by, in particular:

  • memorandum or articles of association of the company;
  • the personal data of members of the management board and supervisory board with a description of their qualifications and professional experience;
  • economic and financial analysis of the feasibility of operations for a period of one year;
  • a description of the remuneration policy.

It is not mandatory to have a local investment manager, interpreted as a natural person, in order to manage an AIF. It should be noted that an SFIO and a FIZ can be established only by a TFI with its registered seat in the territory of Poland. Similarly an ASI may be established only by ASI managers registered in Poland. There is no legal requirement to have members of TFI's bodies or ASI manager's bodies of Polish nationality or residence. However, the PFSA has issued Principles of Corporate Governance for Supervised Institutions, which stipulates that management bodies and supervisory bodies of TFIs and ASI managers should include an appropriate participation of people with relevant knowledge of the Polish language and who manifest an appropriate experience and knowledge of the Polish financial market. In addition, managers are subject to relevant labour law requirements or, in specific cases, migration law requirements (eg, work permits).

As mentioned in 2.7 Requirement for Local Investment Managers, a TFI needs to be a joint-stock company with a registered seat in the territory of Poland. Moreover, a TFI is required to organise its operations in a way ensuring that: (i) there is a proper number of employees necessary to appropriately provide its specific services; and (ii) the persons referred to in item (i) above should possess the necessary knowledge, skills and experience to perform their duties and that such knowledge and skills be kept and improved by these persons. Generally, it is mandatory to hire at least two investment advisors and a securities broker. However, in case of a TFI that manages only portfolio funds or non-public assets funds, it is not required to hire investment advisors.

An ASI manager may be established as a company (such as a limited liability company). The basic obligation of an ASI manager is to conduct its operations of management of ASIs in a reliable and professional manner, with due diligence and in compliance with the principles of fair trading, and in the best interest of ASIs that it manages and their investors, as well as to ensure the stability and security of the financial market. The organisational structure of an ASI manager – including its systems, procedures and procedures of activity – needs to be aligned with its size, nature, scope and complexity. In addition, in case the rights of participation to at least one ASI could be marketed among retail investors, an ASI manager needs to employ at least one investment advisor.

Each AIF needs to have a custodian responsible for safe-keeping the assets and maintaining the register of assets. In case of an SFIO and a FIZ, only a domestic bank (with no less than PLN100 million of own funds), a branch of a credit institution with its registered office in Poland (with no less than PLN100 funds allocated for management to that branch) or Krajowy Depozyt Papierów Wartościowych S.A. (KDPW) are entitled to be custodians.

A FIZ is also able to choose as a custodian an investment firm entitled to perform specific activities and with initial capital of no less than EUR730,000. In case of an ASI, the list of potential custodians is broader and includes: a domestic bank; a branch of a credit institution with its registered office in Poland; an investment company (entitled to perform specific activities and with no less than EUR730,000 of initial capital); KDPW; and a prime broker acting as a counterparty to this company (if specific conditions are met).

AIF, TFI and ASI managers are considered as so-called "obliged institutions" under the Act on Counteracting Money Laundering and Terrorist Financing, which impose on them obligations set forth in the mentioned legal act. An obliged institution needs to apply financial security measures in relation to their clients and identify the risks of money laundering and terrorist financing (KYC). In order to fulfil their obligations, obliged institutions need to designate senior management responsible for the fulfilment of the obligations. In case of TFIs and ASI managers, senior management responsible for such obligations needs to be a member of a management body of those entities. In addition, it is also required to appoint an employee holding a managerial position, who will be responsible for the compliance of the obliged institution, its employees and other persons performing activities for that obliged institution with provisions on counteracting money laundering and terrorist financing and for the specific notification requirements.

AIFs, TFIs and ASI managers are compelled to prepare financial statements, which should be audited by an independent auditor. Audit of the financial statements should be performed by an auditor firm, which may be an entity in which audits are carried out by statutory auditors and which operates in one of the specific legal forms (stipulated in the Act on statutory auditors, audit firms and public supervision) and is entered in the list of audit firms. Generally speaking, audit may be performed by an audit firm located in the territory of Poland. A statutory auditor has a special role, because it is obliged to inform the PFSA, through the intermediation of the audit firm, of any material irregularities identified during the audit or review of the financial statements of a TFI, ASI manager, AIF or specific types of ASI, and of any breach of the applicable laws.

Each AIF must have properly valued assets. In case of an SFIO or a FIZ, valuation of assets may be performed by: (i) a TFI being the fund’s body, provided that the valuation is conducted independently of managing the fund’s investment portfolio and in an accurate manner, and that the remuneration policy restricts the occurrence of conflicts of interest, including the exerting of pressure on an employee’s decisions; or (ii) an external valuer appointed by the fund, independent of the fund, TFI, EU manager, and the entities having close links with those entities and guaranteeing proper and accurate performance of the valuation.

An external valuer can be: an audit firm; an entity entitled to render book-keeping services; an entity entitled to be the custodian of an SFIO or a FIZ described above; or any other entity whose specialised area of activity guarantees a proper performance of the valuation. In relation to an ASI, valuation of assets may be performed, subject to similar requirements as in case of an SFIO or a FIZ, by: (i) an ASI manager; or (ii) an external valuer. However, in this case, an external valuer can be: an audit firm; an entity entitled to render book-keeping services; an entity entitled to be the custodian of ASI described above (except for a prime broker acting as a counterparty to this company); or any other entity whose specialised area of activity guarantees a proper performance of the valuation.

Generally, non-local service providers can also perform functions in the structure of an AIF, TFI or ASI manager. However, such providers are compelled to fulfil specific registration requirements. For instance, in order to perform the function of the custodian, a credit institution is subject to notification procedures before the PFSA and registration before the registry court.

CIT

Pursuant to the Polish regulations on corporate income tax, AIFs are taxpayers of income tax. The income (revenues) obtained by an AIF are subject to general taxation. The tax is 19% from the excess of revenues over the costs of obtaining them. Taxpayers are required to pay monthly tax advances during the tax year.

AIFs may benefit from specific tax preferences. However, this possibility depends on meeting many statutory conditions.

Rules applicable to a FIZ

Income (revenues) of a FIZ are exempt from tax, provided that they do not constitute income from participation in tax transparent entities – ie, companies without legal personality or organisational units without legal personality, if these entities are not treated as legal persons and are not subject to tax on all their income.

Exemption also does not apply to:

  • income (revenues) from interest on loans granted to tax transparent entities;
  • income (revenues) from interest on capital participation in tax transparent entities;
  • donations or other free benefits obtained from tax transparent entities;
  • income (revenues) from interest (discount) on securities issued by tax transparent entities;
  • income (revenues) from the sale of securities issued by tax transparent entities or shares in these entities;
  • income from commercial real estate, including those obtained by tax transparent entities.

Rules applicable to an SFIO

An SFIO, like an FIO, is, in principle, an entity exempt from tax, which means that all income (revenues) obtained by such fund is tax exempt.

However, if an SFIO applies the investment rules and restrictions specified for a FIZ, then no exemption is granted, and tax exemption rules, such as in the case of a FIZ (described above) will apply. This means that only income that meets the statutory conditions will be exempt.

Taxation of an ASI

An ASI may benefit from a tax exemption if it obtains income (revenues) from the sale of shares, provided that these shares have been held by ASI for a period of at least two years and constituted not less than 10% of shares in the capital of the company whose shares are sold. However, the exemption cannot be applied if the real estate located in Poland constitutes over 50% of the assets of the company whose shares are being sold.

VAT

If an AIF carries out taxable activities, it becomes a VAT payer. AIF operations are subject to the general VAT rules.

The basic VAT rate in Poland is 23%. Taxpayers are required to settle the tax monthly (or on a quarterly basis), submit declarations, and send a standard audit file (JPK, financial data in electronic form.

Thus, it is also possible to apply exemptions resulting from the Polish VAT Act, among others, in the field of services related to shares in companies or other entities with legal personality as well as services related to financial instruments.

Tax on Civil Law Transactions

Certain activities performed as part of an AIF's activities may also be subject to tax on civil law transactions if they are included in the catalogue of activities indicated in the Polish Act on the tax on civil law transactions (eg, the sales contract). However, the Act provides for a tax exemption for the sale of property rights, which are financial instruments, carried out through investment firms or as part of organised trading.

The issue of tax liability or the possibility of applying an exemption should be considered each time a transaction is carried out.

General Anti-avoidance Rule (GAAR)

For all of the above entities and in regard to the possibility of applying tax exemptions, however, the general tax avoidance clause in force in the Polish tax system should be taken into account. Pursuant to the provisions, an act – one of the main objectives of which is to achieve a tax advantage – which is incompatible in the given circumstances with the subject and purpose of the Tax Act, cannot result in obtaining a tax advantage if the course of action was artificial (ie, tax avoidance).

If the tax authorities recognise that there are reasons to apply the clause, a decision will be issued abolishing preferential taxation. This may result in the need to pay a tax liability, default interest, as well as imposing an additional tax liability.

Double taxation agreements apply to individuals and entities that are treated as a legal entity for tax purposes. Thus, the applicability of the provisions of the double taxation agreements depends on the tax status of the AIF.

SFIOs and FIZs

SFIOs and FIZs have legal personality and under the Polish CIT Act they are taxpayers of income tax and are subject to tax on all their income, regardless of where it is earned. It does not matter that entities may benefit from tax exemptions.

Thus, if an SFIO and a FIZ have the status of a taxpayer, then all tax provisions will apply to them, including the provisions of agreements on the avoidance of double taxation to which Poland is a party. This means that after fulfilling the conditions provided for in the regulations, all tax preferences arising from such contracts will also apply.

ASI

An ASI may act as a capital company or as a limited joint-stock partnership or limited partnership. Capital companies and a limited joint-stock company are taxpayers of corporate income tax and, therefore, under a double taxation agreement, they fall under the scope of these regulations and so could qualify for benefits. It is different when an ASI operates in the form of a limited partnership, which is a tax transparent entity, which means that the provisions of agreements on the avoidance of double taxation do not apply to it.

AIFs in the Polish jurisdiction often use SPVs in their structures. An SPV provides a chance to diversify the portfolio of a fund and therefore mitigate the risk of investments. The most popular SPV is a general partnership, where a general partner is a limited liability company with a minimal share capital (ie, PLN5,000) and a limited partner is an AIF. Such structure offers both tax transparency and risk diversification. In addition, an SPV in a form of limited liability company is also being used, but it is not tax transparent.

According to publicly available information, promoters and sponsors of Polish AIFs come mainly from Poland and North America (above all, the USA) or Europe (member states of the EU).

According to publicly available information, investors of Polish AIFs come mainly from Poland and North America (above all, the USA) or Europe (member states of the EU).

Although it is difficult to track all investment made by Polish AIFs, it may be claimed on a very general level that investments of Polish AIFs are typically located in Poland, but there are some examples where investments are located outside of Poland – mostly in other member states of the EU.

In recent years, it can be seen that the activities of investment funds are subject to increased control by Polish tax authorities. This is probably due to the fact that closed-end investment funds (FIZ) were used to build structures aimed at tax optimisation. The effect of such activities are frequent controls, as well as changes in regulation limiting the exemptions available for investment funds.

One positive change is the introduction of tax exemption (as of 1 January 2019) for some income obtained by an ASI. This increases the investment attractiveness of this type of AIF in Poland.

Each SFIO needs to publish (on the website that is indicated in its statute) its prospectuses, key investor information, semi-annual and annual financial statements. A public FIZ (ie, a FIZ in which investment certificates are offered to the public, admitted to trading on a regulated market or introduced to trading on a multilateral trading facility) publishes or makes available to the investors concerned a prospectus or information memorandum and its financial statements. A (non-public) FIZ publishes its annual and semi-annual financial statements at the request of its participant. In addition, the statute of an SFIO or a (non-public) FIZ may extend the disclosure requirements on individual investment components of the fund.

Furthermore, a TFI, an ASI manager (subject to the regulatory approval process described in 2.6 Regulatory Approval Process) and an EU manager shall disclose information for the AIF’s client before the acquisition of relevant participation rights to the applicable AIF. Such information should be prepared in the form of a single document and include specific information listed in the Act on Investment Funds.

In addition, each AIF makes periodically available to its investors information about:

  • the percentage share of assets subject to special arrangements in connection with their illiquid nature;
  • amendments to internal regulations relating to liquidity management;
  • the current risk profile and risk management systems applied by the entity managing them.

In addition, the AIF regularly informs its investors about: (i) changes in the maximum level of the AIF financial leverage which may be applied on its behalf as well as the right to reuse the collateral and guarantee granted on the grounds of an arrangement for the AIF financial leverage; (ii) the total amount of the AIF financial leverage applied.

TFIs and ASI managers are also required to submit to the PFSA information regarding:

  • investing activities carried out on behalf of the SFIOs, FIZs, ASIs, and EU AIFs under management;
  • liquidity and risk management concerning the SFIOs, FIZs, ASIs, and EU AIFs under management – with respect to each of them;
  • the application of the AIF financial leverage in the SFIOs, FIZs, ASIs, and EU AIFs under management that apply such AIF financial leverage – with respect to each of them.

In addition, the TFI, ASI manager (subject to the regulatory approval process) needs to submit to the PFSA and to the AIFs' participants annual statements of each AIF, within specified time limits. Moreover, managers of alternative investment funds also should submit supplementing information necessary for the monitoring of a systemic risk to the PFSA.

It is also required that entities specified in Article 225 of the Act on Investment Funds, including TFIs and ASI managers, submit to the PFSA periodic reports and ongoing information relating to their activities and financial situation. The scope of statements and information provided to the PFSA is specified in separate regulations.

MDR

The establishment of a FIZ or ASI could be treated as a tax scheme according to the MDR rules, effective in Polish tax law from 1 January 2019, and should be reported.

Pursuant to the MDR regulations, from 1 January 2019, some entities are required to provide tax authorities (specifically, the Head of the National Tax Administration) with information on tax patterns. The tax scheme is a tax solution in which the most frequent tax advantage occurs; it is a broad concept and may apply to all taxes. The regulations indicate the features of a given business or economic relationship that may determine the existence of the tax pattern and thus the reporting obligation.

The entity obliged to report may be a promoter (eg, a tax advisor), a supporting entity (eg, a notary public) or a beneficiary (ie, the entity that implemented the tax scheme).

Information on the transferor and beneficiary, description of the tax scheme, applied tax law provisions and the expected amount of tax benefit are reported to the tax authorities.

This information is to be transmitted electronically using logical structures made available by the Ministry of Finance.

Failure to submit may result in fines (up to PLN21.6 million in the case of persons responsible for submitting the notification).

The lower chamber of the Polish Parliament (Sejm) is currently working on the Act relating to the entry into force of the EU legal regulations concerning the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market and as regard to the encouragement of long-term shareholder engagement.

That Act will introduce significant amendments to the financial market regulations, including the Act on Investment Funds. The amendments would relate to, in particular: the structure and requirements of a TFI's management board; the establishment of specific types of AIFs; provisions regarding investment certificates; disclosure of engagement policies of TFI and ASI managers; marketing requirements; the PFSA's supervisory measures. Taking into account the current status of the legislative works, it is expected that such Act could enter into force before the end of 2019 or the beginning of 2020.

Moreover, in the Sejm there are legislative works on the amendment of the Act on the liability of collective entities for acts prohibited under penalty. The amendment is aimed at extending the liability of collective entities and facilitates the execution of their liability and applies also to AIFs, TFIs and ASI managers. It is still under debate whether these regulations will be finally structured and, if so, how.

In addition, on 12 July 2019 the Directive (EU) 2019/1160 of the European Parliament and of the Council of 20 June 2019, amending Directives 2009/65/EC and 2011/61/EU with regard to cross-border distribution of collective investment undertakings (AIFMD2), has been published. AIFMD2 regulates "pre-marketing" of AIFs to investors and should be implemented by member states by 2 August 2021.

The legal structure chosen by AIF managers generally depends on the amount of the gathered funds, and therefore of the prospective size of the portfolio. It may be said that smaller managers prefer the form of an ASI, because it is subject to less severe regulation requirements and is more cost-effective in case of relatively low amounts of gathered funds. Accordingly, managers who intend to manage large portfolios could favour the structure of a TFI.

The management body of a TFI shall consist of at least two members. Only managers, who possess full legal capacity for legal acts, have not been punished for any crime or fiscal crime committed with intent and are of good reputation regarding the functions performed, are entitled to be the members of a TFI's management board. Moreover, at least two members of the management board, including the chairman, should have tertiary education or be investment advisors and have at least three years' experience in financial market institutions in a managerial position, independent position or in their own bodies.

The same requirements apply to the members of a TFI's supervisory board, with the exception that at least half of the members of such body needs to have tertiary education or be investment advisors but they do not need to have the experience mentioned above in financial market institutions. The PFSA should be notified about the appointment of a new member or any changes in the composition of the management board or the supervisory board.

The management board of an ASI manager is composed of at least two members. The requirements regarding legal capacity for legal acts, clean criminal record and good reputation described above apply also to the members of the management body and the supervisory body of ASI managers. Furthermore, at least two members of the management board, including the chairman, need to have tertiary education or be investment advisors and have at least three years' experience (as described above) in financial market institutions or other entities dealing with asset investment in accordance with the investment policy or investment strategies applied by an ASI or in their own bodies, or as a general partner or partner in charge of affairs of such entities. The supervisory board is a mandatory body of an ASI manager and the requirements for members of such board match those imposed on the members of a TFI's supervisory board described above. Notification requirements to the PFSA correspond with the requirements regarding the TFI described above.

Only natural persons having full capacity for legal acts, who are not convicted for specific offences indicated in the Penal Code and in the Code of Commercial Companies, are entitled to be the members of management boards or supervisory bodies, commercial proxies or liquidators of a TFI or an ASI manager.

The Polish tax system does not provide for any special taxation rules for entities managing investment funds. Such entities are subject to general taxation rules. The tax is 19% from the excess of revenues over the costs of obtaining them. Taxpayers are required to pay monthly tax advances during the tax year.

However, investment fund management is, in principle, subject to exemption from VAT.

There are no special regulations in the Polish tax system regarding the possession or the lack of permanent establishment by an AIF.

Carried interest is taxed on a general basis. The Polish tax system does not provide for any tax preferences in this respect. Such income is subject to the standard 19% tax rate.

TFIs are entitled to outsource some of their operations to third parties through written agreement. However, outsourcing cannot lead to discontinuance of the core activities of a TFI (ie, in particular, management, establishment, representation of funds). Moreover, it is required to immediately notify the PFSA about the intention to conclude any such outsourcing agreement.

A TFI may outsource its activities only if particular conditions specified in the Act on Investment Funds are cumulatively met; these include that outsourcing will not affect the effectiveness of the PFSA's supervision over a TFI, and that a TFI is able to impartially justify the outsourcing of a given activity and its scope). A TFI may also outsource the management of the investment portfolio of a fund or its part. In such case, an outsourcing agreement may be concluded only with specific entities referred to in the Act on Investment Funds, with some exceptions relating to specific types of funds. For instance, outsourcing of the management of an investment portfolio of non-public assets funds may be entrusted to a specific entity, which is supervised by a competent supervisory authority for the capital market and holds a permission to manage portfolios comprising of one or more financial instruments. It is also possible to outsource the management of the investment fund’s risk.

ASI managers are also allowed to outsource their activities, including the management of the investment portfolio and of the investment fund’s risk. The regulatory requirements imposed on ASI managers regarding outsourcing generally match the requirements imposed on TFIs.

In case of a TFI, it is mandatory to hire at least two investment advisors and one securities broker, subject to particular exemptions. An ASI manager should have at least one investment advisor. It should be noted that a TFI's share capital may come only from documented sources – means for covering share capital or acquiring shares cannot come from a loan or credit. The same requirements apply to ASI managers, except for an internal ASI manager, which may cover part of its share capital or acquire specific amount of shares through means of a loan or credit.

A non-local manager – ie, a legal person with its registered office in a member state of the EU that has received a permission from competent authority in that state to manage AIFs in accordance with EU law governing the management of AIFs – is entitled to operate in Poland (EU manager).

An EU manager is subject to notification procedure before the PFSA and may operate in Poland through a branch or as a part of cross-border operations. In case of establishment of a branch, an EU manager is governed by the law of its home state, but is obliged to comply with Polish laws, including acting in the best interests of the participants of an AIF and in a reliable and professional manner. However, an EU manager should always comply with the applicable Polish laws relating to an SFIO or FIZ and other applicable regulations. In addition, EU managers are subject to disclosure requirements to the PFSA and to the participants of funds and ASIs.

AIFs are used by both public and private investors. Among others, public investors invest in start-ups or innovative small and medium-sized enterprises, companies with growth potential or private equity funds. In relation to private investors, in Poland there are venture capital and private equity investors, as well as so-called "business angels". In addition, some private investors choose the form of an AIF in order to manage their wealth, reorganise or restructure their businesses, transfer their wealth on to the next generation or because of the need for business privacy.

The Act on Investment Funds generally differentiates two categories of clients to whom marketing could be addressed – professional and retail clients.

The definition of "professional clients" covers (in principle) persons/entities to which a proposal is made regarding the acquisition of participation units, taking up of investment certificates or acquisition or taking up of participation rights of an ASI, possessing the experience and knowledge enabling it to make proper investment decisions and properly assess the risk connected with those decisions, and which is:

    1. a domestic bank, a foreign bank or a credit institution;
    2. an investment firm;
    3. a domestic insurance establishment or a foreign insurance establishment or a domestic reinsurance establishment or a foreign reinsurance establishment (within the meaning of relevant provisions of Polish law) carrying out its activity on the territory of the Republic of Poland;
    4. an investment fund, an ASI or another collective investment institution, an investment fund society, an ASI manager, a management company or an EU manager;
    5. a retirement pension fund or a retirement pension society (within the meaning of relevant provisions of Polish law);
    6. a commodity brokerage house (within the meaning of relevant provisions of Polish law);
    7. an entity that concludes, as part of the economic activity pursued, for their own account, transactions on markets of futures contracts, options or other derivative instruments or on money markets exclusively in order to secure the positions taken on these markets or which acts for this purpose, for the account of other members of such markets, provided that the responsibility for the discharge of the obligations arising out of these transactions is borne by settlement participants of these markets;
    8. a financial institution other than the ones mentioned in letters a) to g) above;
    9. an institutional investor other than those listed in letters a) to h) above, carrying out regulated activity on a financial market;
    10. an entity conducting outside the Republic of Poland the activity on conditions equivalent to the activity carried out by the entities listed in letters a) to i) above;
    11. an entrepreneur meeting at least two of the following requirements, it being understood that the equivalent in PLN of the amounts expressed in EUR shall be calculated at the average euro exchange rate announced by the National Bank of Poland as on the date of drawing up by a given entrepreneur of financial statements:
      1. the balance-sheet total of that entrepreneur amounts to at least the equivalent in PLN of EUR20 million;
      2. the value of revenue from sales earned by that entrepreneur amounts to at least the equivalent in PLN of EUR40 million;
      3. own capital or own fund of that entrepreneur amounts to at least the equivalent in PLN of EUR2 million;
    12. a public authority managing a public debt, a central bank, the World Bank, the International Monetary Fund, the European Central Bank, the European Investment Bank or another international organisation fulfilling similar functions;
    13. another institutional investor whose basic object of activity is investing in financial instruments, including a subject dealing with the securitisation of assets or concluding of other types financial transactions;
    14. an entity other than the ones indicated in letters a) to m) above, which is treated as a professional client.

According to the Act on Investment Fund, "retail client" is understood as a person/entity who receives the proposal of acquisition of participation units, taking up of investment certificates or acquisition or taking up of participation rights of an ASI, not being a professional client or being a professional client who is treated as a retail client when making a proposal of acquisition of participation units, taking up of investment certificates or acquisition or taking up of participation rights of an ASI.

The Act on Investment Funds does not provide for extensive regulations on AIF marketing. It even does not stipulate a legal definition of "marketing". However, it may be claimed on the basis of other provisions provided for in the aforementioned legal act that, for AIF, "marketing" could be described as making a proposal of acquisition of participation units, investment certificates or acquisition of participation rights in an ASI.

Although the understanding of "marketing" seems to be rather general, we are not aware of any additional provisions of statutory law or soft-law regulations (such as recommendations or guidelines), which could be helpful in interpretation of the activities (such as making a "proposal") referred to above.

In terms of specific regulations on marketing, the Act on Investment Funds stipulates that information disseminated by specific entities which intermediate in transactions involving participation units of investment funds or participation titles of foreign funds and open-end investment funds with their seats in EEA member states for the purposes of advertising or promoting the services provided by such entity, must be accurate and understandable.

Additionally, information about an investment fund or a collective portfolio of securities published by a TFI, including advertising information, must provide a reliable description of the financial position of the fund or a collective portfolio of securities and the risk involved in participation in the fund or a collective portfolio of securities, and in specific cases also identify the issuer, surety or guarantor of securities. The information published may not be misleading. Each advertising information regarding the acquisition of participation units or investment certificates must specify the existence of an information prospectus, key investor information, prospectus, information memorandum or terms of issue, respectively, and specify the place where a given document is publicly available.

As regard to information on an ASI published by an ASI manager, including advertising information, it must fairly present the financial position of that company and the risk associated with the participation in an ASI. If the said publications are considered misleading, the PFSA may prohibit their publication and order publication of appropriate corrections within the time limit set.

Local investors can invest in AFIs established in Poland.

As noted in 4.3 Rules Concerning Marketing of Alternative Funds, the Act on Investment Funds does not provide for a legal definition of "marketing" and consequently it may be problematic to determine which regulatory filings are, or are not, related to marketing activity as such. Assuming that "marketing" activity should be understood literally, the regulatory filing obligations towards the PFSA, which could be qualified as related directly to marketing activity are rather limited.

According to the above-mentioned provisions, an FIO is obliged to provide to the PFSA the following documentation:

  • information prospectuses and key investor information – immediately after their preparation;
  • annual financial statements, and (in the case of the umbrella fund) combined annual financial statement of the fund and individual annual statements of sub-funds – immediately after having them audited by an expert auditor;
  • semi-annual financial statements, and (in the case of an umbrella fund) combined semi-annual financial statements of the fund and semi-annual individual statements of sub-funds – immediately after having them reviewed by an expert auditor.

The FIO, being the feeder fund, must immediately furnish to the PFSA – in addition to the documents specified above – the information prospectus, key investor information and any amendments thereto, as well as the master fund's annual and semi-annual financial statements.

The FIO also provides the PFSA with information on amendments in the information prospectus or key investor information immediately after their introduction.

For AFI disclosure requirements versus investors, see 2.18 Disclosure/Reporting Requirements.

FIZ and SFIO

Profit-taking from having units in a FIZ and an SFIO may take the form of:

  • payment of profit without buying out participation units/investment certificates;
  • payments due to the liquidation of the fund;
  • redemption of participation units/investment certificates;
  • sale of investment certificates.

The method of taxing profits varies depending on the investor's legal form as well as their tax residence.

CIT

CIT taxpayers, being Polish tax residents, in the case of payment of profit without buying out participation units and liquidation of the fund, are obliged to pay 19% tax on the amount obtained. However, in the case of redemption of units or their sale, the profit is the amount obtained by the investor less the costs of purchasing such units. This difference is taxed on the 19% rate.

In case of a profit being withdrawn without buying out participation units, the tax should be collected by the tax remitter – ie, the FIZ or SFIO or the entity maintaining the securities account on which these securities are registered, if the payment of the claim is made through it.

Payment of profit without buying out participation units is subject to withholding tax, which the tax remitter is obliged to collect. To be able to apply the relevant agreement on the avoidance of double taxation, the investor must provide a valid certificate of tax residence. In addition, the tax remitter must demonstrate that he/she exercised due diligence in examining whether the investor met the conditions for recognising him/her as the actual beneficiary of the claims paid. If the verification turns out to be positive, then on this basis the tax remitter can apply the provisions of a particular contract, which usually provide for no tax obligation or a preferential rate.

Since 1 January 2020, the application of the agreement on the avoidance of double taxation will be possible if the payment to the same taxpayer within one tax year does not exceed the amount of PLN2 million (approximately EUR500,000). If the payment will be higher than the amount indicated, the tax remitter will be required to collect 19% tax on the amount paid. Although it will be possible to avoid tax collection in the described situation, it could prove to be quite difficult to implement and transfer the responsibility for not collecting tax to the tax remitter, which may mean that tax remitters may not want to use them for their security. In the event of tax collection, the investor may recover the amount collected from the Polish tax authorities. An official request must be made for this.

In the event of payment of other types of profit from participation in an SFIO or FIZ to entities that are not Polish tax residents, the Polish tax law does not provide for the obligation to collect withholding tax. Thus, only income earned in Poland is taxed. The provisions of Polish tax laws will apply, including tax avoidance agreements. In such a situation, it is necessary to examine the provisions of the specific agreement determining in which country the income from an AIF should be taxed.

PIT

In the case of individual investors, the tax is charged by the tax remitter – the entity paying the claim or the entity maintaining the securities account on which these securities are registered – if the payment of the claim is made through it. This tax is transferred to the account of the competent tax office.

The tax is charged in the amount of 19%, but in the case of sale of participation units in capital funds, or redemption of participation units or investment certificates, expenditure on their acquisition is a tax cost.

If the investor does not have a tax residence in Poland, then it is possible to apply the provisions of agreements on the avoidance of double taxation.

However, it should be remembered that in order to apply the relevant agreement on the avoidance of double taxation, the investor must provide the tax remitter with a valid certificate of tax residence. In addition, the tax remitter must demonstrate that he/she exercised due diligence in examining whether the investor meets the conditions for recognising him/her as the actual beneficiary of the claims paid. If the verification turns out to be positive, then on this basis the tax remitter can apply the taxation principles arising from a particular agreement. However, the application of the agreement on the avoidance of double taxation is possible if the payment to the same taxpayer within one tax year does not exceed the amount of PLN2 million (approximately EUR500,000). If the payment is higher than the amount indicated, the tax remitter will be required to collect 19% tax on the amount paid.

Although it will be possible to avoid tax collection in the described situation, nevertheless it could be quite difficult to implement and transfer the responsibility for not collecting tax to the tax remitter, which may mean that tax remitters may not want to use them for their security. In the event of tax collection, the investor, after submitting the application and meeting the statutory conditions, may recover the amount collected from the Polish tax authorities.

ASI

Due to the legal form of an ASI, which may be in the form of a limited company, limited joint-stock partnership or limited partnership, the payment of profit is taxable in accordance with the principles of taxation of participation in such companies.

In the case of limited companies and limited joint-stock partnerships, the dividend and receivables from the share in the profits of legal persons and limited joint-stock partnership will be taxed. Such profits are, in principle, subject to tax at the rate of 19% of dividend paid; in the event of redemption of shares or liquidation of a company, the income is reduced by the costs of purchasing the shares. The tax is charged through the tax remitter, which is the company or entity maintaining the securities account. If the investor is an entity without a Polish tax residence, it is possible to apply exemptions or tax rates resulting from the relevant agreement on the avoidance of double taxation – however, the condition is the presentation of a valid certificate of tax residence and fulfilment of conditions such as due diligence by the tax remitter and payment below PLN2 million (as described above).

In the case of a limited partnership, the income and expenses attributable to participation in such a partnership are determined in proportion to the right to participate in the profit of that partnership. Income and expenses are settled on an ongoing basis during the tax year.

FATCA

The provisions implementing FATCA regulations entered into force in Poland on 1 December 2015. The provisions imposed on financial institutions an obligation to collect a statement from clients if they are American taxpayers.

Obligations of financial institutions arising from FATCA include:

  • identifying individual and business clients (financial account holders) in terms of having US taxpayer status;
  • verifying that corporate clients are controlled by the US taxpayer (ie, the beneficial owner within the meaning of anti-money laundering and anti-terrorist financing regulations);
  • annually reporting data on these clients and their income to Polish tax authorities.

Customers of financial institutions, on the other hand, are required to provide information and documents required to correctly determine their status for the needs of FATCA.

CRS

From 1 May 2017, financial institutions are required to collect a statement from clients if they are tax residents of another country. This obligation results from the Act of 9 March 2017 on the exchange of tax information with other countries.

Obligations of financial institutions under CRS include:

  • identifying individual and business clients (financial account holders) in terms of having tax resident status in other countries;
  • verifying that clients are controlled by a tax resident of another country for the purposes of CRS (ie, are a real beneficiary within the meaning of the provisions on counteracting money laundering and terrorist financing);
  • reporting data on these clients and their income to the Polish tax authorities.

Customer obligations under CRS include:

  • submitting a tax residence declaration;
  • updating data on tax residence status within 30 days.
Hogan Lovells LLP (Warsaw) LLP

Plac Trzech Krzyży 10/14
00-499 Warszawa
Polska

+48 22 529 29 00

+48 22 529 29 01

hoganlovells.warsaw@hoganlovells.com www.hoganlovells.com
Author Business Card

Law and Practice in Poland

Authors



Hogan Lovells LLP (Warsaw) LLP is one of the largest law firms in the world, with over 2,500 lawyers working in over 50 offices in 26 countries on six continents. Hogan Lovells is one of the top law firms in Poland and provides comprehensive legal and tax services. The global private equity team at Hogan Lovells has extensive experience advising private equity sponsors and investment funds on their investments and co-investments. Its fund clients include alternative and multistrategy asset managers such as pension funds and sovereign wealth funds. The firm advise its clients on the investment process from fund formation, through buy-out and portfolio management to exit, regularly counselling investors on sectors such as real estate, business services, consumer and retail, transport and logistics, industrials, automotive, and chemicals. The team provides also regulatory insight needed for the formation, and operation of investment funds, including alternative investment funds.