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Polish-Cayman agreement on exchange of tax information opens way to applying judgment in Emerging case to income of Cayman investment funds

Rafal Mikulski of Dentons explains why Cayman Islands' investment funds may be entitled to a tax exemption in Poland and to claim for overpaid tax from the Polish tax authorities.

The Agreement for the Exchange of Information Relating to Tax Matters signed on November 29, 2013, by and between the Republic of Poland and the Cayman Islands, was published on February 6 2015, in the Journal of Laws of Poland (the Agreement) and went into force.

It is the first agreement of its type between those states and was enabled by, first and foremost, a wholly new approach of the Cayman administration to the issue of the exchange of tax information. The Cayman Islands has joined a group of states combating financial offences and counteracting terrorist financing.

The draft agreement was prepared on the basis of the OECD's Model Agreement. Its purpose is to provide mutual assistance by exchanging tax information important for the administration and application of the signatories' national laws. In particular, it covers information that is required to determine, assess and/or collect taxes or debt; to enforce and collect outstanding tax; and to investigate or prosecute tax matters.

The agreement applies to taxes imposed by both parties. For Poland, these taxes include personal income tax and corporate income tax (CIT). For the Cayman Islands, it includes “all kinds of taxes,” though the nation does not levy income or corporate taxes. The agreement will also apply to taxes of the same or similar type imposed after its signing date, either in addition to or in place of existing taxes.

The most important effect of signing the agreement is that the Cayman Islands is no longer on Poland’s list of countries and territories applying harmful tax competition with respect to CIT. The Polish minister of finance prepared a new regulation on this matter.

Court ruling on exemption
In this context, it is worth mentioning an emerging possibility to examine the application of the income tax exemption to Cayman  investment funds in light of the decision handed down by the Court of Justice of the European Union (ECJ) in case no. C-190/12 (Emerging Markets Series of DFA Investment Trust Company).

To date, all income of Cayman funds deriving from investments in Poland was subject to a 19% income tax. If a Polish company paid a dividend, this income was reduced by the tax. In contrast, Polish investment funds benefit from a tax exemption.

In Emerging, the ECJ found that the exemption can also be applied to a fund from a third country on the basis of the EU principle of free movement of capital. The basic condition for its application is that an agreement on mutual administrative assistance is binding. The agreement in this case allows national tax authorities to verify information delivered by the investment funds regarding the conditions of their incorporation and their operation to determine whether they conduct activities within a regulatory framework equivalent to the EU regulatory framework.

Based on the agreement, it is possible to argue in the discussed case that a Cayman investment fund satisfies the conditions to apply the income tax exemption for investment funds and reclaim overpaid income tax in Poland.

The practice of tax authorities in this respect has been evolving reluctantly. Therefore, proving the right for an investment fund from a third country to reclaim tax in Poland is part of a long-running dispute. However, there is positive movement in the practice of Polish administrative courts, which are handing down rulings in favour of funds from outside the EU based on the clear guideline of the ECJ in Emerging.

Rafal Mikulski (rafal.mikulski@dentons.com) is a counsel in the Warsaw office of Dentons.

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