The popularity of alternative investment funds has been growing uninterruptedly. It has become clear that investors, looking for opportunities to grow their assets using optimal investment instruments, have already seen how efficient AIFs are. Regulatory easing, high flexibility and preferential taxes encourage investors to choose this vehicle for their investment activities. In 2021, as compared to the end of 2020, around 40 new companies were entered in the AIF Management Register maintained by the Financial Supervision Authority.
Investment funds are being side-lined! What benefits does an Alternative Investment Fund provide?
Over the past 5 years, since changes were made to the Legislation on Investment Funds and the Management of Alternative Investment Funds, we have been seeing a downward trend in the use of Closed-End Investment Funds as investment vehicles. It is quite safe to say that the implementation of Alternative Investment Funds into the market has ushered in a revolution in the capital markets. Changes were not particularly extreme in the first stages. This new vehicle – AIF – had to win investors’ confidence, but more importantly it needed to wait for favourable tax changes. The real breakthrough came in 2019 with the implementation of legislation guaranteeing an array of tax breaks to AIFs.
The abovementioned circumstances were due to increasingly strict policies by the Financial Supervision Authority aimed at TFIs (investment fund companies) and depositaries. Furthermore, the introduction of unfavourable tax changes affecting investment funds has led to a sharp increase in interest in Alternative Investment Funds.
In conclusion, in recent times, AIFs have been gaining in popularity as investment vehicles at the expense of FIZs (closed-ended funds). This trend is visible to the naked eye to us professionals. It is demonstrated through, among others, the annual Report of the Chamber of Fund and Asset Management, which shows that more than 120 investment funds had wound up in 2020! At the same time, more and more alternative investment companies appear in the AIF management register. The below chart illustrates this trend well [Closed-ended funds (FIZ)]:
This is not the end of preferential treatment for AIFs – there are more tax breaks on the horizon
In mid-June 2021, the Ministry of Finance published a draft law amending the Corporate Income Tax (CIT) Act and the Personal Income Tax (PIT) Act, which will provide further tax breaks for AIFs and their investors.
The project allows for:
the easing of conditions for benefiting from tax exemption by AIFs, i.e. lowering to 5% the exemption threshold for income from Alternative Investment Funds from disposal of shares in another company. Currently, in order to benefit from the aforementioned exemption, the AIF must own at least 10% of the shares for a minimum of 2 years before selling them;
preferential tax treatment for tax payers who wish to invest in an AIF. The tax payer will have the right to make deductions from their tax base. The deducted amount will be the equivalent of 50% of the cost incurred to acquire (subscribe for) shares in an AIF or in a company in which an AIF holds at least 5% of the shares. The relief is aimed at natural persons who earn income taxed on a progressive rate basis or those who earn income from non-agricultural economic activities taxed on a flat rate basis of 19%. Such a deduction would be made in the return for the tax year in which those expenses were incurred, with the caveat that the maximum amount of the deduction must not exceed PLN 250,000. It is also conditional upon a minimum of a 2-year period of ownership of the shares.
The new legislation is scheduled to come into force in early 2022.
What does that mean?
The introduction of these solutions will enable shareholders and minority shareholders with a more diversified portfolio to use AIFs. It will also make it easier for investors involved in a wide range of industries to run their business. Entrepreneurs who pay PIT on income derived from regular business activities or other personal income will be able to deduct up to 50% of their cost of acquisition of shares in an AIF or in a company in which an AIF holds at least 5%. In other words, money saved through reduced income tax can be invested in an AIF!
Throughout the years we have gained a vast amount of experience with AIFs and this is how they work:
Registration and what comes next?
In order to actually start doing business through an AIF, certain formalities need to be completed upon registration. Alongside the notification of registration, the Financial Supervision Authority provides information on the registration fee amount (EUR 2,000) and the annual fee for capital market supervision (EUR 750). The AIF also obtains an individual bank account number, used to pay what fees are due.
Electronic Information Transfer System – link between AIF and KNF (Financial Supervision Authority)
As soon as the notification has been received, a representative of the Alternative Investment Fund should fill out an application form for the issuance of an Electronic Information Transfer System (ESPI) account and subsequently submit this request to the Information Technology Department of the Financial Supervision Authority. The application must provide the name of the ESPI operator, i.e. an authorised employee/associate of the supervised company. The operator uses this above-mentioned system to connect directly to the KNF, primarily to send legally required information, summaries, reports, receiving information, etc.) Furthermore, the Company – as a user of the IT system – is obliged to carry out all necessary technical installations in accordance with the guidelines of the Financial Supervision Authority and ensure correct connection to the System.
As required by the Authority, information transmitted by the AIF – as a user of the ESPI – within the system will be carried out through prescribed forms designed to provide information about specific events which fall under information obligation. When completing the forms, it is necessary to carefully follow the instructions set out by the KNF and remember that the uploaded reports must be in a structured file format.
What does an AIF report to the KNF?
On the one hand, accounting for and reporting on an Alternative Investment Fund can be quite the challenge for the unprepared! On top of the legal and tax aspects of running a company, reporting issues must not be underestimated. The information obligations of an AIF are quite complex, not only from a technical standpoint (meeting requirements to enrol in the IT system), but above all in ensuring the correct completion of forms.
Each AIF sends to the Authority an electronic management report in DATAMAN format, as well as individual reports of each managed AIF, in DATAIF format, via the ESPI. Most importantly, the names of these files should also be in line with the template published on 21 December 2016 by the Ministry for Development and Finance on supplementing the information obligations of alternative investment fund managers. Companies registered in the AIF management register receive a special identifier, which they must use when carrying out their reporting obligations. Once the forms have been sent to the Authority, they are validated and, depending on the outcome, the file is either accepted or adjustments are required.
On the other hand, the scope of reporting obligations is not too burdensome, although it should be carried out before the end of January, for the prior year, so when it comes to reporting and financial logistics this is a rather demanding deadline. AIFs are obliged to provide the KNF with among others:
information on the main instruments it trades and the degree of geographical and sectoral concentration of investments,
information on the markets in which it participates or on which it carries out active transactions,
information on portfolio diversification.
Practise makes perfect
Just in the last few months, the team at Panasiuk & Partners has carried out several projects to register alternative investment funds. We have seen first-hand the importance of providing comprehensive support (not only legal and tax), when one of our clients submitted their first report to the Authority. An accounting practice providing accounting and reporting services to one of their clients asked us for assistance. Hours of discussions and close cooperation, between the legal, accounting and IT teams, were required to finalise reporting. This is why we meet market needs and provide clients setting up Alternative Investment Funds with a complete 180-degree service – both at registration stage and through ongoing operations. We combine ongoing legal and tax advice by coordinating all accounting, business and reporting aspects. Our team of experts consists of specialist in legal and tax matters; finance professionals who expertly prepare complete reports and select the most adequate method of valuing the transactions reported within the AIF; brand experts and specialists in activities related to the presentation of the company to external environments – its objectives and values.
Finally, how do AIFs work?
How does an Alternative Investment Fund work? The last twelve months have shown that AIFs are gaining in popularity among investors. The downward trend of FIZs has consistently deepened and the popularity of AIFs has grown. There is no question that undisputed advantages such as flexibility, tax preferences (which will soon be extended further), limited supervision by KNF and low maintenance costs, represent a wide range of benefits offered by Alternative Investment Fund, that are effectively pushing investment funds out of the market.
An AIF is worth taking into consideration if you plan to:
raise funds from other investors for further investment;
invest in stocks and shares;
invest capital in new technologies and start-ups;
consolidate existing investments within a single managing entity;
Of course, it is necessary to specify future objectives before deciding on the form of investment activity. This allows the selection of the right instruments for their implementation. An AIF or a FIZ will not always be needed to carry out a transaction. Oftentimes a “regular” company is enough. Carrying out a legal and tax analysis of the planned activities will allow us to understand which solution is best.
PARTNER | ATTORNEY-AT-LAW | CERTIFIED INSOLVENCY AND RESTRUCTURING ADVISOR
Andrzej has gained his experience working on numerous projects involving foreign investors and major Polish companies in the field of M&A, sale and acquisition of enterprises, as well as on a variety of company restructurings and reorganizations, including by way of merger (also cross-border), division, transformation and liquidation. Being a Certified Insolvency and Restructuring Advisor, […]
Sylwia specialises in providing services to domestic and foreign business entities, including investment funds, alternative investment companies, banks and brokerages. She has participated in numerous mergers and acquisitions (M&As), restructurings and reorganisations of companies and has been involved in obtaining financing. She provides legal advice related to wealth management, investments and business security. She also has […]
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