Preferences for PIT payers investing in alternative investment companies and new conditions for the tax exemption for AICs from 2022 | In Principle

The bill published on 26 July 2021 to amend the Personal Income Tax Act, the Corporate Income Tax Act and certain other acts, known as the Polish Deal, provides payers of personal income tax with a new preference to encourage investments in ventures carrying high economic risk. The proposed relief is intended to apply to certain investments by PIT payers in an alternative investment companies or their subsidiaries.

Alternative investment companies

For PIT purposes, an alternative investment company (AIC) means an alternative investment company as defined in Art. 8a of the Act on Investment Funds and Management of Alternative Investment Funds of 27 May 2004. Thus, an AIC, which is to be covered by the new PIT relief, is an alternative investment fund other than an open-ended investment fund, specialist open-ended investment fund, or closed-ended investment fund. An AIC may conduct business in the form of:

• A limited-liability company, a joint-stock company or a European company, or
• A limited-partnership or a joint-stock limited partnership whose only general partner is a limited-liability company, a joint-stock company or a European company.

With certain exceptions, the exclusive business of an AIC is to collect funds from many investors with a view to investing them in the interest of the investors in accordance with a defined investment policy.

50% deduction of expenditures on acquisition or subscription of shares

The relief planned in the Polish Deal is to enable a deduction from the PIT tax base of an amount equal to 50% of the expenditures for acquisition or subscription of shares of

• An AIC, or
• A company in which
  • An AIC holds at least 5% of the shares, or
  • An AIC will hold at least 5% of the shares as a result of acquiring or subscribing to shares in the company within 90 days after the taxpayer acquires or subscribes to shares in a company.

The proposed preference is to be subject to four conditions:

• A shareholder of an AIC is to be an entity that acquired or subscribed to shares in an AIC financed in whole or in part from repayable European funds intended for venture capital investments in Poland within the meaning of Art. 2(5) of the Public Finance Act of 27 August 2009, i.e. in particular from:
  • Funds coming from structural funds, the Cohesion Fund, the European Fisheries Fund, or the European Maritime and Fisheries Fund (with certain exclusions)
  • Non-reimbursable aid granted by member states of the European Free Trade Agreement (with certain exclusions)
  • Funds from the Norwegian Financial Mechanism, the Financial Mechanism of the European Economic Area, or the Swiss–Polish Cooperation Programme
  • Funds for implementation of the common agricultural policy
  • Funds allocated for implementation of the Youth Employment Initiative
  • Funds from the Fund for European Aid to the Most Deprived, or
  • Funds from the Connecting Europe Facility.
• The taxpayer has concluded with an AIC an investment agreement regulating the rights and obligations of the AIC and the taxpayer resulting from the acquisition by the taxpayer of shares in the AIC or a joint investment by the AIC and the taxpayer in a company in which the AIC will acquire or subscribe to at least 5% of the shares.
• Within two years preceding the first acquisition or transfer of shares in an AIC or a company covered by the preference, the AIC and the company were not related entities within the meaning of the PIT Act.
• The taxpayer will hold shares the acquisition or subscription of which is to be covered by the relief for an uninterrupted period of at least 24 months.

Actual benefit

The deduction will be recognised in the year in which qualified expenses are incurred, and cannot exceed PLN 250,000 in a given tax year.

The right to deduct from the tax base will be vested in taxpayers earning income taxed under general rules according to the scale (17% and 32% rate) and taxpayers earning income from non-agricultural business activity taxed at a flat rate (19%). Therefore, the actual tax benefit will amount to:

• Up to PLN 80,000 (32% × PLN 250,000) for taxpayers using the tax scale
• Up to PLN 47,500 (19% × PLN 250,000) for flat-rate taxpayers.

A possible correction

In the event of disposal of shares within 24 months after acquisition, the taxpayer who made the deduction will be required to add back the amounts previously deducted to the income for the tax year in which the disposal of shares in the AIC or subsidiary took place. Thus, the taxpayer will be required to make an adjustment in the current accounting period.

Reduction of the minimum percentage of shares held by an AIC for exemption from CIT

Additionally, the Polish Deal contains a proposal to alleviate the prerequisites for exemption from corporate income tax for AICs from the disposal of shares held by it (the term “disposal of shares” should be understood not only as the transfer of shares, but also the acquisition of shares in exchange for a contribution in kind). Currently, the income of an AIC derived in a given tax year from the disposal of shares is exempt, provided that the AIC which sells the shares:

• Prior to the day of disposal, held directly no less than 10% of the shares in the company whose shares are being transferred, and
• Held those shares continuously for a period of two years.

The proposed amendments to the CIT Act included in the Polish Deal envisage lowering the required percentage of shares held by an AIC from 10% to 5% for the AIC to benefit from the exemption from taxation of the income derived from disposal of the shares.

Summary

The proposed changes should be viewed positively, as they are likely to encourage investments in risky ventures. However, the financial needs of this segment of the economy are much higher, and thus their real impact on investments in AICs and qualified subsidiaries will probably be limited. Additionally, doubts may be raised as to the prerequisites for claiming this relief, in particular the prerequisite of the AIC partner’s status as financing or co-financing the acquisition or subscription of shares in the AIC from specific repayable European funds.

Joanna Prokurat, tax adviser, Tax practice, Wardyński & Partners