The judgment from the Provincial Administrative Court in Warsaw (III SA/Wa 2747/22) dated March 29th, 2023, concerns a case where a Canadian pension fund sought a refund of overpaid flat-rate corporate income tax on dividends from Polish companies.

The claim, seeking to reclaim the residual 15% Polish tax on dividends (after the Polish statutory rate of 19% was reduced to 15% under the Canadian – Polish double tax treaty) was based on the free movement of capital provision in the EU treaty (as the double tax treaty does not provide for 0% or full refund of tax on dividends). Ultimately, the court ruled in favor of the pension fund, repealing the contested decision by the Director of the Tax Administration Chamber in Warsaw and ordering the reimbursement of the pension fund’s court costs.  

This case hinged on whether the pension fund was comparable to Polish pension funds that are exempt from corporate income tax, with the court finding that the Canadian fund's broader investment activities did not preclude it from being considered comparable for the purposes of tax exemption. The judgment is based on the principles that the refusal to grant a tax refund constitutes discrimination prohibited under EU law and violates the free movement of capital, as stipulated in the Treaty on the Functioning of the European Union (TFEU).

NUS's Position

The NUS' (Polish tax authorities) position in the proceedings is multifaceted, focusing on several key aspects:  

Alternative Investments and Business Activities 

NUS identified that the complainant conducted alternative investments, including in real estate and private equity, in various countries and provided secured loans under certain conditions, which were not part of the benefits catalog provided by entities such as the Social Insurance Institution or the Social Insurance Fund​​. 

Comparison with National Pension Funds 

NUS emphasized the fundamental differences between the complainant and national pension funds, including the Social Insurance Institution and state special-purpose funds. This distinction was based on their business and the regulatory framework. National pension funds, by law, may not engage in activities such as granting loans, which is a part of the complainant's activities​​. 

Legal Position and Public Finance 

NUS argued that entities like the Social Insurance Institution and the Social Insurance Fund, which manage public funds under a special legal regime, should be distinguished from the principle of free movement of capital due to their social purpose and the public nature of their funds. This distinction is crucial to ensure the financial balance of these entities, for which the State Treasury is fully responsible. Thus, the investment policy of these entities should not be subject to the principle of free movement of capital, as applying this principle could significantly impact their financial balance and contradict their social objectives​​. 

Overpayment and CJEU Ruling 

NUS addressed the issue of overpayment in corporate income tax arising from a Court of Justice of the European Union (CJEU) ruling. They suggested that, in cases involving overpayments by funds from third countries, the CJEU's judgment should be applied. This approach indicates a willingness to align with EU principles, specifically the principle of free movement of capital, when it does not conflict with the specific legal regime and social purpose of national entities​​. 

Overall, the NUS' position is centered on distinguishing the complainant's activities and legal framework from those of national pension funds and other entities managing public funds, based on the specifics of their operations, regulatory compliance, and the underlying social and fiscal responsibilities. 

The DIAS’ Position 

The DIAS' (Director of the Tax Administration Chamber ) position on the case centers around several key points regarding the comparability of C. (the Complainant) to domestic entities that are exempt from income tax under the provisions of the Corporate Income Tax (CIT) Act: 

Misinterpretation Allegations 

The Complainant argued that DIAS misinterpreted the provisions of the CIT Act, particularly concerning the subjective exemption from taxation for certain resident categories (i.e., pension funds and investment funds), with the overarching principles of Community law. The Complainant's position was that Polish tax regulations were inconsistent with the principles of free movement of capital, and the prohibition of discrimination based on nationality because they did not extend similar tax exemptions to comparable non-residents. 

Comparability Analysis 

DIAS conducted a comparability analysis and determined that C. was not comparable to exempt pension funds due to the broader scope of C.'s permitted activities, which could not be reconciled with the activities of Polish and EU pension funds.  

The analysis considered whether the Company met certain conditions under the CIT Act to qualify as comparable to national pension funds. DIAS concluded that C. did not meet all the specified conditions and, therefore, was not comparable to Polish pension funds or state special funds, particularly the Social Insurance Fund (FUS) or the Social Insurance Institution (ZUS). 

Application of EU Principles 

The Complainant emphasized that tax exemption in Poland should be available to all entities operating within a regulatory framework equivalent to that applicable to domestic entities. They argued that DIAS' comparability analysis was overly narrow and failed to consider the guidelines from the case law of the Court of Justice of the European Union (CJEU) and administrative courts, indicating hidden discrimination. 

DIAS' Stance on Tax Exemption Criteria 

DIAS maintained that the criteria for tax exemption under the CIT Act could not directly apply to entities from third countries. It argued that if the legal and factual situations of compared entities (resident and non-resident) were different, the differential treatment under the provisions applicable in resident law could not be considered discriminatory. DIAS emphasized that the provisions of the Treaty on the Functioning of the European Union (TFEU) could not be interpreted without regard to the provisions of the CIT Act. 

In summary, DIAS upheld its position that the Complainant was not comparable to domestic entities exempt from income tax, based on a strict interpretation of the CIT Act's provisions and a narrow approach to comparability analysis. This stance was challenged by the Complainant, who argued for a broader, more inclusive interpretation in line with EU principles and the need for objective comparability. 

The Provincial Administrative Court’s position  

The Provincial Administrative Court's considerations on objective comparability ensure that entities in a comparable situation, especially in terms of tax treatment, are treated as equal, aligning with the principle of non-discrimination. This principle is underscored by the need to assess whether a non-resident entity operates within a regulatory framework equivalent to that applicable to domestic entities, to ascertain objective comparability. The Court of Justice of the European Union (CJEU) has emphasized this approach, particularly in its 10 April 2014 judgement in the case of Emerging Markets (C-190/12), highlighting the importance of EU law's primacy over national regulations in ensuring such comparability. 

A key aspect of objective comparability involves assessing the economic functions performed by the entities subject to comparison, rather than insisting on identical formal and legal characteristics. This perspective was affirmed in the CJEU's judgment in the Aberdeen case (C-303/07), which the court also referenced, indicating that the assessment should be based on the economic roles of the entities involved, irrespective of their formal legal structures. This approach suggests that for foreign entities to be considered for tax exemptions like those provided to Polish entities, they must not necessarily be identical, but should be equivalent in function and organization. This equivalence is essential for ensuring that entities operating in different regulatory environments within the EU and EEA member states are treated equally under the law, thereby adhering to the principles of free movement of capital and non-discrimination. 

The complete text of the decision can be found here.