A newly proposed amendment to the Polish Corporate Income Tax Act (the CIT Act) aims to fundamentally reshape the tax exemption for foreign investment funds. The draft legislation addresses two key Court of Justice of the European Union (CJEU) judgments that found Polish rules to be discriminatory. By codifying principles that funds previously had to fight for in court, the changes promise a more stable and predictable environment for cross-border investment.
The amendment introduces two landmark changes: it extends the CIT exemption to funds domiciled in third countries (outside the EU/European Economic Area) and to internally managed (self-managed) investment funds.
A history of judicial intervention
For over a decade, Polish domestic law remained in breach of EU law, forcing foreign funds into a challenging legal environment. Until now, Polish law offered no direct solution to the two issues addressed by the amendment, leaving funds to rely exclusively on judicial and administrative proceedings in which they were required to prove infringement of EU law by Polish regulations to assert their rights.
The first issue concerned funds from third countries. Despite a clear CJEU judgment issued in 2014 (Case C-190/12, Emerging Markets Series) stating that excluding these funds from the tax exemption was discriminatory, Polish law has not been amended in this respect. As a result, the only recourse for these funds was to initiate lengthy tax refund proceedings to reclaim withheld tax. The scale of this issue is striking: between 2014 and 2025, over 2,500 such proceedings were concluded, forcing the Polish budget to refund approximately PLN 1.2 billion in tax and an additional PLN 435 million in interest.
The second issue was the requirement for funds to be managed by an external management company. This condition was also challenged in court, culminating in the CJEU judgment of February 27 2025 (Case C-18/23), which confirmed that denying the exemption to self-managed funds violates the free movement of capital. The new amendment seeks to end this long-standing reliance on court battles by codifying these pro-taxpayer principles directly into the CIT Act.
Key questions arising from the amendment
While the reform is a major step forward, it leaves some critical questions unanswered and introduces new complexities.
Why are third-country pension funds excluded?
The draft legislation expands the exemption for investment funds from third countries but fails to grant the same treatment to pension funds, which remain limited to EU/European Economic Area entities. This omission is significant, as the non-discrimination principles articulated by the CJEU could arguably apply to pension funds as well. The legislator has taken a narrow approach, focusing only on addressing the specific judgments at hand, thereby creating a new potential point of discrimination.
Transitional rules: what about tax paid before 2026?
The new law would take effect on January 1 2026, and apply to income earned from that date. It does not provide retroactive relief. This means that for any withholding tax incurred in periods prior to 2026, foreign funds must still rely on the direct application of EU law and the existing CJEU judgments. They will need to continue using the established tax refund procedures to reclaim overpaid tax for past years, as the new, simplified rules will not apply to historical liabilities.
Is the automatic information exchange requirement necessary?
To balance the expansion of the exemption, the draft introduces new safeguards, including a strict requirement for an automatic exchange of information (AEOI) mechanism, such as the Common Reporting Standard or a Foreign Account Tax Compliance Act agreement, to be in place with the fund’s country of residence.
The government justifies this as a measure to prevent abuse. However, this could be seen as imposing excessively strict requirements. In the Emerging Markets case, the CJEU suggested that the existence of a standard information exchange clause in a double tax treaty was a sufficient safeguard to prevent abuse. Requiring a full AEOI framework on top of an existing treaty may be an excessive burden not fully justified by the court’s reasoning.
Final thoughts
Following two landmark CJEU judgments – one issued over a decade ago (C-190/12) and the other more recently (C-18/23) – long-standing discrimination against investment funds based on their non-EU domicile and internal management structure has finally been addressed in draft legislation. However, there is still work to be done; e.g., a relaxation of other exemption conditions and an extension of exemptions to third-country pension funds.
