10 years ago

On 10 April 2014, the Court of Justice of the European Union (CJEU) rendered its decision in case C-190/12 Emerging Markets Series of DFA Investment Trust Company. The CJEU found that the exclusion of a non-EU investment fund, specifi- cally a US investment fund, from the benefit of a tax exemption on Polish source dividends from which domestic and EU investment funds benefit may constitute a restriction to the freedom of movement of capital if Polish authorities are able by way of bilateral agreements to verify the comparability between US funds and Polish funds. The Court has referred the case back to the Polish court for examining whether this condition is given.


Under the provisions of the Polish Corporate Income Tax Act, all income, including dividends and interest, received by investments funds that have their registered seat in Poland is exempt from tax. Under certain conditions, the same rule applies to investment funds located in other EU or EEA (European Economic Area) member states. Dividends and interest paid to the investment funds located outside of Poland/EU/EEA are not covered by the exemption and remain subject to withholding taxes in Poland.

Over the past few years in particular, a number of non-EU or EEA foreign investment funds have filed withholding tax reclaims in Poland on the basis that limiting the tax exemption to Polish/EU/ EEA investment funds constitutes a restriction to the freedom of movement of capital.

This freedom is one of the four fundamental freedoms which form the basis of the internal EU market. It applies, with some limits, to transactions between an EU Member State and a non-EU Member State such as the United States of America. It has been used in a series of rulings of the CJEU, notably involving mutual funds or pension funds, to challenge rules discriminating foreign investors compared to similar domestic investors with respect to the taxation of dividends.

On 28 March 2012, after a series of contradictory Polish rulings on this issue, a Polish District Administrative Court referred the following questions to the CJEU, in the context of a reclaim led by a US investment fund:

• Does the prohibition of restrictions to the freedom of movement of capital apply in the context of a national law which grants a tax exemption to EU investment funds but not to an investment fund which is a tax resident of the United States (in reference to Article 63 of the Treaty on the Functioning of the European Union, TFEU)?

• Can the difference in treatment between EU and non-EU based investment funds be legally justified notably by the need for effective fiscal supervision (in reference to Article 65(1) (a) and Article 65 (3) of the TFEU)?


CJEU decision

In its decision, the CJEU concludes that a Member State may not exclude from a tax exemption, dividends paid by nationally established companies to an investment fund established in a non-Member State if there exists between the two States an obligation of mutual administrative assistance. The Polish rules, which restrict the bene t of the tax exemption to Polish/EU/EEA investment funds, are contrary to the prohibition of restrictions to the freedom of movement of capital and cannot be legally justified by the need for effective scal supervision if an obligation of mutual administrative assistance exists. In particular, contrary to the position defended by Advocate General Mengozzi in his opinion issued on 6 November 2013, the CJEU considers that such a justification for a restriction can only be accepted:

• Where the legislation of a Member State makes entitlement to a tax advantage dependent on the satisfaction of conditions compliance with which can be verified only by obtaining information from the competent authorities of a non-Member State; and

• Where, because that non-Member State is not bound under an agreement to provide information, it proves impossible to obtain that information.

The Court finds that in this case, there is a regulatory framework of mutual administrative assistance between Poland and the United States of America which permits the exchange of information required for the application of tax legislation. It is nonetheless for the referring court to examine whether the obligations under agreements are in fact capable of enabling the Polish tax authorities to verify, where it may be necessary, the information provided by investment funds established in the United States of America, in order to determine that they operate within a regulatory framework equivalent to that of the EU.

The fact that the US investment funds are not part of the EU’s uniform regulatory framework (UCITS Directive) cannot alone
be sufficient reason to find the situations non-comparable. This is in clear opposition to the AG’s opinion. The Court ruled that since the UCITS Directive does not apply to investment funds established in non-Member countries because they are outside the scope of European Union law, a requirement that such investment funds be regulated in the same way as resident investment funds would deprive the principle of free movement of capital of any practical effect. For the comparability test, it must be examined whether non-EU investment funds operate under conditions equivalent to those applicable to investment funds established in the European Union.


As a result of this decision, the Polish Court now has to examine whether they have sufficient instruments to verify the comparability. Should this be the case, Poland would be required to treat Polish, EU, EEA and other foreign investment funds equally. Consequently, the legislator is requested to adopt a non- discriminatory legislation at the domestic level (e.g., extension of the exemption to non-EU/EEA investment funds). This decision also constitutes a strong argument in support of refund claims of non-EU or EEA investment funds, especially from the US. Furthermore, if an investment fund has been declined a refund in the past in Poland, it should analyze existing possibilities to reopen its claim as soon as possible (reopening within the period of one month from the date of publication of the CJEU ruling in the official journal of law may entitle the fund to interest for late payment; after the one month period reopening is also possible as long as the tax is still not barred by statute of limitation).

This ruling is a strong signal sent to certain European countries whose discriminating tax regimes have already been challenged by CJEU decisions but which continue to discriminate against foreign EU and non-EU investment funds, either in law or in administrative practice.