Foreign Real Estate Funds in Poland

Investment in real estate has always been and will continue to be one of the more attractive forms of investing capital. This is linked to the fact that real estate is still perceived as one of the most secure and profitable forms of investment. This concerns in particular the market of commercial properties in Central and Eastern Europe, including Poland.

One of the reasons behind increased interest of foreign investors in the Polish real estate market is the country's recent EU accession, which accelerated the process of bringing Polish real estate prices up to European levels. The growth in real estate prices guarantees a high rate of return on invested capital.

Another important factor making investment in real estate in Poland attractive is that taxes on investment income generated by properties are relatively low compared to tax burdens in the investors' countries of origin. Moreover, a decisive factor for optimizing tax burdens on property-generated income are the provisions of double taxation treaties signed by Poland. Under these agreements, income of this type is taxable only in the country where the property is located. In the investor's country of origin, income generated in the country where the property is located-in this case in Poland-is usually exempt from tax. These factors have made the Polish real estate market attractive for foreign investors who invest their capital indirectly, through a foreign investment fund, in properties in Poland.

After collecting an appropriate amount of capital, a foreign investment fund invests a major part of the money in a specific commercial property in Poland. This is usually done through the acquisition of an existing special-purpose entity.

In most cases, the concept of an investment fund is based on the structure illustrated by diagram 1.

From the legal point of view, a property located in Poland is owned by a Polish partnership. In practice, before becoming part of a fund's structure, special purpose entities operate as corporations, in most cases as limited-liability companies. In the process of the fund's establishment, they are transformed into commercial partnerships, in most cases unlimited or limited-liability partnerships.

An overwhelming majority of shares in the special-purpose entity are purchased by a foreign investment fund, which also operates as a partnership under the law of the country where it has headquarters.

Established in this way, the investment fund collects money from individual foreign investors in exchange for share certificates. Of course, until the fund attracts a specific number of individual investors its own capital is financed by a short-term bank loan.

In most cases there is an additional player, an investor's trustee, operating between the individual investor and the investment fund. The trustee is a corporation which manages shares in the fund in its own name but on behalf of the investor. This solution makes it possible to avoid the need of entering each investor as a shareholder in the fund (partnership) into a commercial register in the country where the fund is headquartered. An appropriate register is kept by the trustee. The trustee acts as a shareholder in the fund (partnership) in external dealings. In internal relations, investors have the same rights as "direct" partners in a partnership. Trusteeship relations are governed by a trust deed.

An individual investor can also participate in a fund directly, without a trustee. However, indirect participation in the fund, through a trustee, considerably simplifies tax payments in the country where the property is located. Additionally, trusteeship is also designed to free the individual investor from liability towards creditors of the fund (partnership).

The basic source of a foreign real estate fund's income is rental income generated in Poland by the special-purpose entity from renting commercial space. Of course, from the legal point of view, this income is generated for the fund from its being a partner in a special-purpose entity. However, from the economic perspective, one can say that the fund's income, or rather the investors' income, is derived from renting properties in Poland.

The taxation of income generated through the fund and transferred to individual investors is based on two principles - tax transparency and trusteeship.

In the case of a partnership, the transparency principle means that, for income tax purposes, it is the partners rather than the partnership that are liable to pay tax on income generated by the partnership. In other words, the partnership is not a payer of income tax. If a corporation is a partner in a partnership it is liable to pay corporate income tax of 19 percent. Individuals who are partners in a partnership are taxpayers for income tax purposes. In Poland, an individual partner in a partnership, a resident or non-resident, has the right to choose a flat rate of 19 percent to pay tax on income derived from participation in the partnership. This income is treated as income from non-agricultural business activity. And if another partnership is a partner, then in line with the transparency principle one has to analyze the status of its partners to determine whether they are liable to income tax.

The principle of transparency in relation to partnerships has been introduced to most tax systems in the world, including Poland. However, there are exceptions. For example in Finland, Portugal and Spain partnerships are required to pay income tax.

The second principle applied in the structure of foreign real estate funds, trusteeship, combined with the principle of transparency, makes it possible to conceal the actual beneficiaries of income generated through the fund.

The main guidelines for taxing income generated by a real estate fund can be illustrated diagram 2.

Generally, income generated through the fund is taxable in Poland. The payers of this tax are partners in a Polish partnership (special-purpose entity) who can be required to pay income tax, that is legal entities and individuals. These taxpayers are taxed in Poland under limited tax liability, that is only on income derived from sources located in Poland.

Such income, after being taxed in Poland, is usually exempt from tax in the home country of the taxpayer (foreign legal entity, individual investor) under the principle of exemption with progression. Exemption with progression is one of the methods of avoiding double taxation provided for by most agreements signed by Poland with other countries.

In the case of individual investors who participate in a real estate fund through a trustee that is a foreign legal entity, income generated by the special-purpose company is treated as income derived by the trustee and is liable in Poland to corporate income tax (currently 19 percent). In the Polish tax system, the principle of transparency does not apply to trustees who are legal entities-the legal owner of shares in the fund must pay taxes rather than their economic owner. The situation is the reverse in the investor's country of residence. Trustees are not treated as taxpayers deriving income because they act on behalf of the investor, who is the actual beneficiary.
Source: By Dariusz Roszkowski tax adviser at Noerr Stiefenhofer Lutz (NSL)
Krzysztof Sajewski head of the real estate law department at NSL, warsawvoice.pl