Alternative Investment Funds were introduced over four years ago and yet they are still scarcely used. This is despite the introduction of preferential tax rules for ASIs in 2019. This is often due to the common notion that running an ASI requires a number of authorisations, that it is subject to onerous supervision by the Financial Supervision Authority and other stringent obligations.
It really isn’t that bad! In most cases, there is no need to apply for authorisation.
ASI is the answer to the needs of the alternative investment market:
When an alternative investment fund intends to manage an investment portfolio with assets of a value that does not exceed the equivalent of EUR 100 million in PLN, it can avoid the most stringent obligations. Furthermore, if companies managed by an ASI do not use financial leverage and their units can be purchased after at least 5 years from the acquisition date then the threshold is even higher and amounts to EUR 500 million!
Experts estimate that the vast majority of the market is below these thresholds.
- Much leaner registration requirements (the Financial Supervision Authority does not verify the amount of equity, experience in conducting investment activities, economic situation and future financial capability of the applicant);
- Limited supervision by the Financial Supervision Authority which in principle applies only to reporting obligations;
- No requirements regarding the minimum amount of initial capital to carry out business activities (regulations on the appropriate legal form of business activity apply);
- No obligation to have a depositary or professional investment advisers;
- No notification requirement on change of ownership structure of the ASI manager;
- No requirements as to the make-up of the management body of the company.
ASIs in practice:
In a nutshell, Alternative Investment Funds can be defined as trading companies (please note – they should not to be confused with commercial entities), that conduct investment activities and take advantage of preferential tax treatment.
Are ASIs for everyone?
An alternative investment fund may be an enterprise (i.e. a limited company or a public liability company), including a European company, or certain partnerships, or more specifically limited partnerships and partnerships limited by shares.
Such an entity should be used to invest assets for the benefit of its investors. In other words, there are three conditions that a company must meet in order to be able to apply for Alternative Investment Fund status. Those are:
- raising capital from investors;
- investing the capital raised in accordance with a specific investment policy;
- investing the capital raised in the interest of specific investors.
This means that the sole business objective of an Alternative Investment Fund is – as a mutual investment institution – to bring together assets from investors, without conducting any other business activity, and ensure that all contributions made by the company’s investors are deployed exclusively to carry out its investment activities. It is of course possible that in order to carry out its investment activities the company may have to undertake additional activities. However, all such activities must be related to the main activity of the ASI, that is to say, to the investment activity.
The registration of an Alternative Investment Fund is done in 2 steps:
- Step One – takes place before the Financial Supervision Authority and can take up to 3 months;
- Step Two – takes place before the National Court Register and takes about 1 month.
A formidable rival for Closed-End Funds (FIZ):
An Alternative Investment Fund, in particular one operating on the basis of entry in the Register of ASI Managers, constitutes serious competition for closed-end funds and the investment fund companies (TFIs) that manage them. The markedly lower regulatory scope of ASIs allows for a significant reduction in management costs, simplifies the organisational structure, which leads to an improved decision-making process within the company.
In principle, Closed-End Funds can only be established by an investment fund company, the latter of which plays a key role in the fund. It is after all its managing body and it also represents the fund in external relations.
On the other hand, ASIs registered with the Register of ASI Managers have an obligation to report to the Financial Supervision Authority, but their activities fall outside of the scope of the Authority.
Furthermore, unlike Closed-End Funds participants, ASI investors have the right to acquire units in the company without any restrictions or limits.
The obligation to carry out valuations also differs between the two. In the case of a Fund, asset valuations must be carried out at least every 3 months. This requirement is different for an Alternative Investment Fund registered in the Register of ASI Managers, those are required to monitor the total value of assets included in their portfolios and to carry out a valuation once in a 12-month period.
Based on data published by the Financial Supervision Authority, as well as data from the Central Office of Statistics, at the end of 2020 there were 65 Investment Fund Companies, 780 investment funds (as at the end of June 2020) and 240 externally and internally managed ASIs. In summary, investment funds (of all types – closed, open or specialized) still outnumber ASIs circa fourfold.
Preferential tax treatment:
The Corporate Income Tax Act (CIT) provides exemptions for part of the income received by an Alternative Investment Fund. Although its scope is smaller than the exemption enjoyed by Closed-End Funds, it is still optimised for equity investments.
- In accordance with Article 17(1) (58a) of the CIT Act, only income from the disposal of shares shall be exempt, provided that the Alternative Investment Fund which is disposing of the shares has held not less than 10% of shares in the company whose shares are disposed of, and has directly and continuously done so for a period of 2 (two) years.
- Additionally, the exemption does not apply to income (revenue) derived from the disposal of shares in a company ifat least 50% of the value of the assets of such company are, directly or indirectly, made of real estate located within the Republic of Poland or the right to such real estate.
- In the case of alternative investment funds structured as enterprises, it is also possible for those ASIs to benefitfrom a dividend exemption under Article 22(4) of the CIT Act under conditions laid out for that exemption (i.e. holding at least 10% of the shares in the company continuously for a period of 2 years).
- In the context of debt financing costs being tax deductible, rules under Article 15c of the CIT Act (regarding thin capitalisation) also do not apply to ASIs. Therefore, ASIs may include all costs associated with obtaining debt financing without having to follow statutory limits in their revenue expenditure (i.e. interest, commissions), it makes running a business much easier.
An investment vehicle worthy of attention:
Given the limited obligations, little oversight by the Financial Supervision Authority and lower operating costs, but above all, preferential tax rules, it is worth considering setting up an Alternative Investment Fund (which will carry out investment activities following registration with the Register of ASI Managers) when choosing the right investment vehicle. There is no doubt that running an Alternative Investment Fund is not only much cheaper, but also less complicated, if for no other reason than for the lack of involvement from Investment Fund Companies in its management and maintenance.