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The Court of Justice of the European Union (CJEU) on February 27, 2025, held () that a Polish tax exemption granted only to externally managed nonresident investment funds was incompatible with the free movement of capital under EU law.

Background

All domestic funds established under Polish law are exempt for corporate income tax purposes. The Polish Tax Code also provides a tax exemption for Polish-generated income to open ended funds (UCITS), as well as other non-UCITS types of investment funds including specialized funds and closed-ended funds, domiciled in an EU or EEA jurisdiction. However, the fund must be managed by entities authorized by the competent financial market supervisory authorities of the state where the managing entity is based (i.e., externally managed). It should be noted that, under Polish law, the establishment of internally managed investment funds is not permitted.

The taxpayer was a specialized investment fund incorporated in Luxembourg and managed by its board of directors (i.e., internally managed). The board of directors was authorized by the competent Luxembourg supervisory authority, was registered as an alternative investment fund manager, and was also included in the list of managers. The taxpayer applied for an advance tax ruling from the tax authority in Poland that it qualified for the tax exemption for its Poland-generated income, but was denied. The taxpayer then initiated legal proceedings, and the Regional Administrative Court referred the question of the compatibility of the Polish law with EU fundamental freedoms to the CJEU.

The Advocate General issued its opinion on July 11, 2024, that the Polish tax exemption did not restrict the free movement of capital because the tax exemption applied regardless of the domicile of the investment fund and did not result in indirect discrimination.

CJEU judgment

Contrary to the opinion of the Advocate General, the CJEU concluded that the Polish tax exemption was contrary to the free movement of capital. The CJEU noted that the tax exemption did not represent direct discrimination, as the tax exemption was not denied based on the residence of the fund, but on the basis of its management form. Nonetheless, the court found that the tax exemption could still result in indirect discrimination because the tax exemption was linked to conditions or obligations specific to the national market, in such a way that only resident operators are able to meet them, while comparable nonresident operators cannot generally comply.

Read a March 2025 report prepared by ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø’s EU Tax Centre

Read the March 2025 report ²¹²Ô»åÌýApril 2025 report prepared by the ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø member firm in Poland