Provisional text
OPINION OF ADVOCATE GENERAL
KOKOTT
delivered on 11 July 2024 (1)
Case C‑18/23
F S.A.
v
Dyrektor Krajowej Informacji Skarbowej
(Request for a preliminary ruling from the Wojewódzki Sąd Administracyjny w Gliwicach (Regional Administrative Court, Gliwice, Poland))
(Reference for a preliminary ruling – Direct taxes and fundamental freedoms – Article 63 TFEU – Free movement of capital – Taxation of income of collective investment undertakings – UCITS – AIF – Difference in treatment between resident and non-resident collective investment undertakings – Discrimination due to a tax exemption only for externally managed collective investment undertakings – Indirect discrimination in the context of free movement of capital – Comparison of legal types in international tax law)
I. Introduction
1. Does the free movement of capital require a Member State to afford non-resident internally managed and resident externally managed investment funds equal fiscal treatment? That is the question which the Court must answer in this case. In exercising its fiscal autonomy, Poland has opted to exempt only externally, but not internally, managed investment funds. At the same time, under Polish law it is not possible to constitute internally managed investment funds at all. This is in line with the secondary EU legislation, under which Member States are entitled, but not required, to authorise both internally and externally managed investment funds in their national law.
2. Recently, the Court ruled in the case of Veronsaajien oikeudenvalvontayksikkö that a tax exemption which applies only to investment funds constituted under contract, but not under statute, is incompatible with the free movement of capital. In that case, national law did not authorise the constitution of investment funds under statute, with the result that all taxable funds come from abroad. (2) In the view of the Court, there was indirect discrimination in that respect because a non-resident investment fund, which had been effectively incorporated under statute in accordance with the law of its Member State, was deprived of a tax advantage solely on the ground that it was not constituted under contract law, as required.
3. The question which presently arises is whether the principles of that judgment can be applied to this – possibly comparable – case. More specifically, the issue is whether the exercise of an option permitted under EU law can constitute indirect discrimination if other Member States exercise their option in a different way with the result that internally managed investment funds also exist outside Poland. Must they then be granted the same tax exemption in Poland as externally managed investment funds or can the different legal forms also be afforded different treatment under tax law? In these proceedings, the Court therefore has the opportunity to specify the requirements for the existence of indirect discrimination specifically in the area of direct taxes.
II. Legal framework
A. European Union law
4. The EU legal framework is set by Articles 18 and 49 and Article 63(1) TFEU and, in the view of the referring court, also Directive 2009/65/EC on undertakings for collective investment in transferable securities (UCITS) (‘the UCITS Directive’). (3)
5. The recitals of the UCITS Directive are worded as follows, in extract form:
‘(3) National laws governing collective investment undertakings should be coordinated with a view to approximating the conditions of competition between those undertakings at Community level, while at the same time ensuring more effective and more uniform protection for unit-holders. Such coordination facilitates the removal of the restrictions on the free movement of units of UCITS in the Community.
(4) Having regard to those objectives, it is desirable to provide for common basic rules for the authorisation, supervision, structure and activities of UCITS established in the Member States and the information that they are required to publish.
(6) Where a provision of this Directive requires that UCITS take action, that provision should be understood to refer to the management company in cases where the UCITS is constituted as a common fund managed by a management company and where a common fund is not in a position to act by itself because it has no legal personality of its own.
(83) This Directive should not affect national rules on taxation, including arrangements that may be imposed by Member States to ensure compliance with those rules in their territory.’
6. Article 2(1)(b) of the UCITS Directive states:
‘1. For the purposes of this Directive the following definitions apply:
(b) “management company” means a company, the regular business of which is the management of UCITS in the form of common funds or of investment companies (collective portfolio management of UCITS).’
7. Lastly, Article 29(1) of the UCITS Directive provides, in extract form:
‘1. Without prejudice to other conditions of general application laid down by national law, the competent authorities of the investment company’s home Member State shall not grant authorisation to an investment company that has not designated a management company unless the investment company has a sufficient initial capital of at least EUR 300 000.
In addition, when an investment company has not designated a management company authorised pursuant to this Directive, the following conditions shall apply:
…’
B. Polish law
8. In Polish law, the provisions of the Ustawa z dnia 15 lutego 1992 r. o podatku dochodowym od osób prawnych (Law of 15 February 1992 on corporation tax), as amended by the Ustawa z 10 lutego 2017 r. – Przepisy wprowadzające ustawę o Krajowym Ośrodku wsparcia Rolnictwa (‘the Polish Law on corporation tax’), in particular are of relevance.
9. Article 6(1)(10) of the Polish Law on corporation tax provides for a personal tax exemption for certain national investment funds. Under that provision, open-ended investment funds and special investment funds constituted under the Polish Law on investment funds are, in essence, exempt from corporation tax. An exception applies only to open-ended special investment funds which apply the investment rules and restrictions applicable to closed-ended investment funds. There are no other conditions for tax exemption under that provision.
10. A comparable personal tax exemption for UCITS domiciled in an EU or European Economic Area Member State is provided for in Article 6(1)(10a) of the Polish Law on corporation tax. In order to be able to take advantage of the tax exemption, the UCITS must, in essence, satisfy all the following conditions:
(a) they are, in the State where they have their registered office, subject to corporation tax on their entire income, whatever the source of that income;
(b) their sole object is collective investment in transferable securities, money market instruments and other property rights of financial resources raised by means of public or private invitation to purchase their investment securities;
(c) they operate with the authorisation of the competent financial market supervisory authorities of the State in which the registered office of those undertakings is situated;
(d) their business is directly monitored by the competent financial market supervisory authorities of the State in which the registered office of those undertakings is situated;
(e) they have appointed a depositary for the safe-keeping of their assets;
(f) they are managed by entities which have, for the pursuit of their activity, the authorisation of the competent financial market supervisory authorities of the State in which the registered office of those undertakings is situated.
11. Under Article 6(4) of the Polish Law on corporation tax, the tax exemption under Article 6(1)(10a) thereof is not to apply to UCITS which, in essence, are either of the closed-end type or are subject to the investment rules and restrictions applicable to closed-end UCITS (subparagraph 1), or whose units are not offered to the general public under their statute, are not admitted to trading on a regulated market or via an alternative trading system and can be acquired by natural persons only if they make a one-off purchase of units worth at least EUR 40 000 (subparagraph 2).
12. In addition to those personal tax exemptions, Article 17(1)(58) of the Polish Law on corporation tax provides for an object-based tax exemption. Under that provision, the income (revenue) of closed-end UCITS domiciled in another Member State of the European Union or in another country of the European Economic Area referred to in Article 6(4)(1) thereof is, in essence, exempt from corporation tax, provided that it satisfies the conditions set out in Article 6(1)(10a)(a) and (d) to (f) of the Polish Law on corporation tax.
13. The corresponding UCITS must therefore be subject to corporation tax on their entire income in the State in which they have their registered office (point (a)) and be managed by bodies who have, for the pursuit of their activity, the authorisation of the competent financial market supervisory authorities of the State in which the registered office of those undertakings is situated (point (f)). According to the court, that condition in Article 6(1)(10a)(f) of the Polish Law on corporation tax means that the tax exemption applies only to externally managed investment funds, but not to internally managed investment funds.
14. Also of relevance are the provisions of the Ustawa z dnia 27 maja 2004 r. o funduszach inwestycyjnych i zarządzaniu alternatywnymi funduszami inwestycyjnymi (Law of 27 May 2004 on investment funds and the management of alternative investment funds), as amended by the Ustawa z dnia 31 marca 2016 r. o zmianie ustawy o funduszach inwestycyjnych oraz niektórych innych ustaw (Law of 31 March 2016 amending the Law on investment funds and certain other laws) (‘the Polish Law on investment funds’).
15. Article 3(1) of the Polish Law on investment funds stipulates, in essence, that an investment fund is a legal person the sole object of whose business is to invest financial resources in securities, money market instruments and other property rights. Under Article 4(1) thereof, a company is to establish, manage and represent the investment fund vis-à-vis third parties. It also follows from Article 14(1) of the Polish Law on investment funds that an investment fund can be established only by a company.
III. Facts
16. F S.A., established in Luxembourg (‘the applicant’), applied to the Polish Dyrektor Krajowej Informacji Skarbowej (Director of the National Tax Information Office; ‘the defendant’) for an advance tax ruling establishing that the income which it generated in Poland was exempt from tax under Article 17(1)(58) of the Polish Law on corporation tax, in conjunction with Article 6(1)(10a) thereof.
17. In that regard, the applicant stated that it is a specialised investment fund in the legal form of a société anonyme (S.A.; public limited company) incorporated under Luxembourg law. Pursuant to its statute, it is managed by its board of directors and thus internally. The board of directors is authorised by the competent Luxembourg supervisory authority to manage the fund, is registered as an alternative investment fund manager, and is included in the list of managers.
18. The tax status of the applicant in Luxembourg is not entirely clear. On the one hand, the referring court states that the applicant is resident in Luxembourg and is subject to unlimited tax liability there. On the other hand, that court elsewhere assumes that it is a UCITS in the form of a Société d’Investissement à Capital Variable (SICAV). Such a Luxembourg UCITS is in principle exempt from Luxembourg income and capital taxes. At most, a small registration tax (taxe d’abonnement) is levied.
19. The sole object of the applicant’s business is collective investment in transferable securities, money market instruments and other property rights of financial resources raised from private invitation to purchase units in them. The applicant would also like to make similar investments in Poland. Since it is a closed-end investment fund, it is not eligible for the personal tax exemption laid down in Article 6(1)(10a) of the Polish Law on corporation tax on account of the exception provided for in Article 6(4)(1) thereof. However, the applicant considers that the profit which it generates in Poland does fall under the object-based tax exemption laid down in Article 17(1)(58) of the Polish Law on corporation tax.
20. Nonetheless, the defendant refused to issue the advanced tax ruling applied for. As grounds, the defendant stated that only externally managed investment funds could take advantage of the tax exemption on account of the reference in Article 17(1)(58) of the Polish Law on corporation tax to Article 6(1)(10a)(f) thereof. As an internally managed investment fund, the applicant does not satisfy those conditions.
21. The applicant brought an action against the decision refusing its application before the Wojewódzki Sąd Administracyjny w Gliwicach (Regional Administrative Court, Gliwice, Poland) and requested that that decision be annulled.
IV. The procedure before the Court of Justice and the question referred for a preliminary ruling
22. The referring court has doubts as to whether Polish law as it stands is compatible with the fundamental freedoms and the UCITS Directive. It therefore refers to the following question to the Court of Justice:
‘Must the provisions of [Directive 2009/65], and in particular Article 29(1) thereof, in conjunction with Articles 18, 49 and 63 [TFEU], be interpreted as precluding the laying down in national legislation of formal requirements, such as in the main proceedings, for taking advantage of exemptions from corporation tax by undertakings for collective investment whose registered office is in a Member State of the European Union other than the Republic of Poland, or in another State in the European Economic Area, that is to say from the requirement that they be managed by persons who have, for the pursuit of their activity, the authorisation of the competent financial market supervisory authorities of the State in which the registered office of those undertakings is situated?’
23. In response to a request for information from the Court of Justice, the referring court provided additional details in order to clarify in particular the requirements of Polish law for the establishment of an investment fund and the objectives pursued by the Polish legislature.
24. In the proceedings before the Court, the Republic of Poland and the European Commission submitted written observations. In addition to the applicant, the Republic of Poland and the Commission also took part in the hearing held on 29 May 2024.
V. Legal assessment
25. In its question, the referring court first expressly refers to the provisions of the UCITS Directive. However, even after the hearing it is not at all clear whether the applicant constitutes a UCITS within the meaning of the UCITS Directive. Doubts exist, inter alia, because the investments are possibly not public and therefore not raised from the public within the meaning of Article 1(2)(a) of the UCITS Directive. However, it is also unclear whether the tax exemption laid down in Article 17(1)(58) of the Polish Law on corporation tax applies exclusively to common funds within the meaning of the UCITS Directive.
26. However, it is not the Court’s role to interpret national law or to establish the facts of the case. It is therefore not for the Court to determine the accuracy of the premisses on which the referring court relies. (4) I will therefore assume hereinafter that the applicant can, at least in principle, take advantage of the tax exemption laid down in Article 17(1)(58) of the Polish Law on corporation tax.
27. In addition, the referring court asks whether the tax exemption for investment funds with external management provided for in Article 17(1)(58) of the Polish Law on corporation tax, in conjunction with Article 6(1)(10a) thereof, infringes the general prohibition of discrimination under EU law (Article 18 TFEU), the freedom of establishment (Article 49 TFEU) and the free movement of capital (Article 63 TFEU).
28. Therefore, the legislation at issue in the main proceedings must – as the Commission also assumes – nonetheless be examined exclusively in the light of the free movement of capital under Article 63 TFEU. On the one hand, the fundamental freedoms and thus also the free movement of capital entail specific prohibitions of discrimination and therefore the general prohibition of discrimination laid down in Article 18 TFEU does not apply in this regard. (5)
29. On the other hand, the legislation at issue in the main proceedings concerns income of a UCITS from investments in Poland which are made merely as financial investments with no intention of influencing the management and control of the company. The legislation therefore primarily affects the free movement of capital. Any restriction of the freedom of establishment that may also exist would be an unavoidable consequence of the restriction of the free movement of capital and therefore does not justify an independent examination in the light of Article 49 TFEU. (6)
30. Consequently, the referring court essentially asks whether Article 63 TFEU must be interpreted as precluding the legislation of a Member State under which non-resident internally managed investment funds are subject to corporation tax on their income generated in that Member State, whereas resident externally managed investment funds are exempt from that tax. It must therefore be clarified whether the Polish rules lead to a restriction (see A.) or discrimination (see B.) with regard to the free movement of capital. (7)
A. The prohibition on restrictions
31. The Member States must exercise their competence in the field of direct taxation in compliance with EU law and, in particular, with the fundamental freedoms guaranteed by the TFEU. (8) In that regard, Article 63(1) TFEU lays down a general prohibition on restrictions on the movement of capital. In principle, measures such as to discourage non-residents from making investments in a Member State, inter alia, are prohibited. (9)
32. However, in the case of taxes and duties it must be borne in mind that they constitute a burden per se and thereby always reduce the attractiveness of an investment. An examination of taxes based on non-discriminatory restrictions would therefore make all national taxable events subject to EU law and thereby seriously call into question the sovereignty of the Member States in tax matters. (10)
33. This would run counter to settled case-law according to which the Member States are free, in the absence of harmonisation in the European Union, to exercise their powers of taxation in that area. (11) If the Member States’ powers of taxation recognised by the Court and the parliaments’ budgetary powers are not to be unduly restricted, national fiscal measures must therefore be assessed in principle only having regard to the prohibition of discrimination in respect of the fundamental freedoms. (12)
34. For this reason, it has also become established in the case-law of the Court that the fundamental freedoms in tax law always have effect as prohibitions of discrimination and thus in terms of equality law. (13) The main proceedings concern the taxation of externally and internally managed investment funds in Poland. An examination in the light of the prohibition of restrictions is therefore not possible.
B. The prohibition of discrimination
35. Therefore, this could at most result in an infringement of the prohibition of discrimination also contained in Article 63 TFEU. This is because the Member States are also required to design their taxation system to be non-discriminatory. (14) In principle, discrimination means any unequal treatment of comparable cases which places non-residents at a disadvantage in comparison with residents. (15) For that reason, the levying of a direct tax, without distinction, on domestic and cross-border situations cannot result in discrimination. (16)
36. Therefore, a condition for the existence of discrimination, going beyond covert unequal treatment (see 1.), is an objectively comparable situation for the categories between which the Member State differentiates on the basis of the criterion which it has chosen (see 2.). (17)
1. The existence of a difference in treatment
37. A condition for the existence of discrimination is, first, that taxable persons are treated differently from one another. In this respect, not only overt or direct discrimination is prohibited, but also all covert or indirect forms of discrimination. (18)
38. Direct discrimination is linked to impermissible distinguishing criteria. The location of the company seat constitutes such a criterion. (19) The Polish Law on corporation tax does contain different tax exemptions for investment funds domiciled in Poland and those domiciled in EU/EEA States in Article 6(1)(10), on the one hand, and Article 17(1)(58), in conjunction with Article 6(1)(10a), on the other. As a result, however, the exemption from corporation tax is granted irrespective of the domicile of the investment fund. Therefore, direct discrimination is precluded from the outset.
39. At most, there may be indirect discrimination. All forms of discrimination which, by the application of other criteria of differentiation, lead in fact to the same result are also prohibited. (20)
40. In the present case, however, the spirit and purpose of the prohibition of indirect discrimination (see a), the lack of discriminatory effect of the criterion of differentiation chosen by Poland (see b), and the autonomy of the Member States in the taxation of investment funds in the absence of harmonisation under EU law (see c) militate against the existence of indirect discrimination.
(a) Spirit and purpose of the prohibition of indirect discrimination
41. First, the spirit and purpose of the prohibition of indirect discrimination militate against the existence of such discrimination in the main proceedings. Indirect discrimination is not intended to extend the scope of the definition of discrimination, but only to include cases which do not constitute discrimination from a purely formal perspective, but have the same effect. (21) Consequently, strict criteria are to be applied to the existence of indirect discrimination. (22)
42. Indirect discrimination can be assumed to exist where national legislation applies without distinction to resident and non-resident operators, but de facto places cross-border situations at a disadvantage. (23) That is, inter alia, the case where a tax advantage is reserved in situations in which an operator complies with conditions or obligations which are, by their nature or in fact, specific to the national market, in such a way that only operators present on the national market are capable of complying with those conditions or obligations, and non-resident operators which are comparable do not generally comply with those conditions or obligation. (24)
43. In the main proceedings, Article 6(1)(10) of the Polish Law on corporation tax provides for a tax exemption for domestic open-ended investment funds. An essential condition is that the investment fund was established in accordance with the Polish Law on investment funds. It follows from Article 4(1) and Article 14(1) of the Polish Law on investment funds that an investment fund can be established only by a company. In response to a written query from the Court of Justice, the referring court stated that it follows from those provisions that, under Polish law on investment tax, no investment funds managed internally – that is to say by their own bodies – can be established. Consequently, the tax exemption laid down in Article 6(1)(10) of the Polish Law on corporation tax applies only to domestic externally managed investment funds.
44. The applicant, on the other hand, is an internally managed investment fund established in Luxembourg. In so far as it is concerned, it is eligible at most for the tax exemption provided for in Article 17(1)(58) of the Polish Law on corporation tax, in conjunction with Article 6(1)(10a) thereof for investment funds domiciled in an EU or EEA State. However, the tax exemption only applies to investment funds which are managed by an independent management company and thus externally.
45. In the main proceedings, therefore, only this distinction between externally and internally managed investment funds provided for in Polish company law is relevant. In that respect, however, the conditions for the existence of indirect discrimination are not satisfied.
46. First, EU law itself provides for an option as regards the authorisation of internally or externally managed investment funds (see points 58 and 59 below). Thus, the linking of the tax exemption to the external management of the investment fund, as chosen by Poland, is not ‘specific’ to the Polish market by its very nature or in fact. In particular, externally managed investment funds can take advantage of a tax exemption regardless of whether they are domiciled in Poland or in another Member State. Only internally managed investment funds are unable to claim a tax exemption. However, this too applies regardless of the domicile of those investment funds. Therefore, it cannot be assumed that the Polish legislation systematically favours national investment funds. (25)
47. At the same time, the present case differs from the situations in the cases of Veronsaajien oikeudenvalvontayksikkö and UBS Real Estate. In both those cases, the Court assumed that the free movement of capital was affected because the national provisions favoured domestic investment funds. (26) This precisely cannot be assumed in the present case for the reasons stated above.
48. Secondly, the protective function of the fundamental freedoms must also be taken into account when examining indirect discrimination. Since the fundamental freedoms in tax law have an effect as prohibitions of discrimination (see point 31 et seq.), Poland, as a host Member State, is required to ensure treatment equal to that afforded to nationals. On the other hand, cross-border cases should not be favoured. In particular, the fundamental freedoms cannot be claimed improperly. (27)
49. However, that would be the case, for example, if the applicant were not subject to taxation on its income in Luxembourg and yet claimed a tax exemption in Poland. Not only double taxation but also double non-taxation is detrimental to competition in the internal market. (28) Probably also for this reason, Article 17(1)(58) of the Polish Law on corporation tax, in conjunction with Article 6(1)(10a)(a) thereof, requires that the UCITS are to be subject to corporation tax on their entire income in their country of domicile in order to take advantage of the tax exemption. Following the hearing, however, doubts remain as to whether this is actually the case with regard to the applicant in Luxembourg.
50. Thirdly, by Article 6(1)(10) and (10a) and also Article 17(1)(58) of the Polish Law on corporation tax the Polish legislature is likely also seeking precisely to bring about equal treatment for non-resident and resident investment funds. In order to avoid discrimination, it is necessary to match foreign legal forms to the existing taxation systems under national law in accordance with uniform criteria. This is ensured in international tax law in many cases by means of a ‘comparison of legal types’. Under that comparison, companies constituted under foreign law are equated for tax purposes with those constituted in the domestic legal form with which they display the greatest similarities in terms of company law.
51. On that basis, Poland evidently matches internally managed investment funds to other – also internally managed – corporations based on the particular risks. The case in the main proceedings thus differs from that of Veronsaajien oikeudenvalvontayksikkö, (29) on which the Court has delivered judgment, since in that case the Court considered the form of incorporation of an investment fund (under the law of contract or under statute) to be a mere formality (30) and not an expression of particular risk.
52. It is for the referring court to examine whether the comparison of legal types was carried out without making any error of law. If that is the case, the comparison of legal types serves to ensure that the foreign legal form is treated in the same way as the (comparable) legal form in Poland. It thereby ensures that Polish corporate taxation is compatible with the fundamental freedoms and cannot be deemed to entail indirect discrimination.
(b) No discriminatory criterion of differentiation
53. In addition, the basic condition for discrimination is whether the criterion of differentiation chosen by the Member State is at all liable to have a discriminatory effect. (31) There must always be an individual examination of each case precisely with regard to indirect discrimination. It is necessary for the criterion of differentiation ‘intrinsically’ to result in a difference in treatment based on the company’s registered office. (32)
54. This reflects the fact that it is not sufficient to base the existence of indirect discrimination solely on the fact that foreign investment funds are affected in the majority of cases. Rather, there must be a correlation between the chosen criterion of differentiation and the registered office of a company for there to be a difference in treatment comparable to direct discrimination based on the registered office. (33)
55. As has been stated, the differentiation between externally and internally managed investment funds is the only criterion of differentiation that is possible in the main proceedings. However, Polish law generally does not authorise the establishment of internally managed investment funds. In this respect, it makes no difference whether the investment fund has its registered office in Poland or abroad. Strictly speaking, the criterion of differentiation does not exist in Polish law because all investment funds domiciled in Poland are externally managed investment funds. Therefore, internally managed investment funds from abroad are not disadvantaged and internally managed investment funds in Poland are not favoured.
56. Therefore, no form of correlation is evident between the external or internal management of the investment fund and its registered office. Externally managed foreign investment funds are treated in the same way as externally managed domestic investment funds for tax purposes and internally managed foreign investment funds are treated in the same way as comparable domestic entities for tax purposes. Consequently, there is no discriminatory criterion of differentiation in Poland. Therefore, the criterion of differentiation also cannot ‘intrinsically’ result in a difference in treatment depending on the registered office of the investment fund.
(c) Lack of harmonisation under EU law
57. Finally, a finding that there is indirect discrimination in the present case would infringe Poland’s fiscal autonomy.
58. First, the UCITS Directive does not require the Member States to authorise both externally and internally managed investment funds in national law. Rather, the directive seeks to protect investors and therefore merely coordinates national laws by providing for common basic rules. (34) It cannot be inferred from any of the provisions of the directive that the Member States must necessarily give UCITS the option of being managed externally or internally. (35) Rather, it follows implicitly from the sixth recital and Article 2(1) of the UCITS Directive that both forms of UCITS are possible, but do not necessarily have to be provided for.
59. EU law therefore grants the Member States the option of authorising only internally or only externally managed investment funds in national law. Poland has exercised that option by creating only rules for externally managed investment funds. However, that option granted under secondary law would be overlaid by an extensive interpretation of indirect discrimination. That would fail to have regard to the intention of the EU legislature.
60. Secondly, in tax law it is for the Member States to determine which companies are subject to normal taxation as corporations and which are taxed at preferential rates as investment funds. Accordingly, the UCITS Directive should not, according to recital 83 thereof, affect national rules on taxation. Outside the spheres in which EU tax law has been harmonised, it is the Member State concerned which determines, by exercising its own competence, the characteristics constituting the tax. (36) This includes, in particular, the determination of the basis of assessment, the taxable event and any exemptions. (37)
61. Therefore, Member States can in principle also choose, for example, the conditions and the level of taxation for the different legal forms. (38) Consequently, the situation can be no different even if a Member State decides to authorise only externally managed investment funds and thus to tax internally managed investment funds according to a different system than domestic and foreign externally managed investment funds.
62. On that basis, the Polish legislature has ‘merely’ taken a decision on the legal form within the limit of its powers. Consequences for tax purposes are attached to that legal form in a general and non-discriminatory manner. The free movement of capital cannot require a Member State to adjust its legislation to that of another Member State in order to ensure, in all circumstances, taxation which removes any disparities. (39) Rather, the decisions made by a taxpayer as to investment in another Member State may be to the taxpayer’s advantage or not, according to circumstances. (40)
63. Thirdly, these considerations are reinforced by the fact that Poland would not be barred under EU law from also authorising internally managed investment funds and then taxing them normally, that is to say in the same way as other capital companies. As long as Poland did not differentiate between domestic and foreign internally managed investment funds, there would be no infringement of the free movement of capital.
64. In the present case, on account of Poland’s choice of legal form there are no internally managed investment funds in Poland, which is why there is (or can be) a priori no differentiation between domestic and foreign internally managed investment funds. To try and construe this as indirect discrimination – as the Commission appears to advocate – goes too far and disregards both the scope for implementation that the UCITS Directive has precisely granted Poland and the Member States’ fiscal autonomy in the area of direct taxes. That would effectively force Poland to authorise the establishment of internally managed investment funds in its national law.
(d) Interim conclusion
65. Therefore, discrimination can be ruled out because there is no indirect difference in treatment of taxpayers. Militating against this are both the spirit and purpose of the prohibition of indirect discrimination and the fact that Poland has not chosen a discriminatory criterion of differentiation. Lastly, this conclusion is reinforced by Poland’s autonomy over the taxation of investment funds.
2. In the alternative: Whether the situations are objectively comparable
66. Should the Court of Justice nevertheless assume indirect discrimination, it would then have to be examined whether the situations in the main proceedings are at all objectively comparable. If any difference in treatment is based on different situations, discrimination is ruled out for that reason alone. (41) Furthermore, the examination of objective comparability prevents a situation where the Member States are not able to provide for objectively justified differentiations in their rules merely because the distinguishing criterion correlates – in some cases even incidentally – to the place in which a company has its seat. (42)
67. It is therefore necessary to examine whether resident externally managed investment funds and non-resident internally managed investment funds are in an objectively comparable situation. (43) Comparability must be examined having regard to the aim pursued by the national provisions at issue. (44) On that basis, there is some doubt as to whether there is objective comparability in this case.
68. It is not clear from the request for a preliminary ruling what aims the Polish legislature is pursuing with the corporation tax exemption for externally managed investment funds. The Commission therefore assumes that the aim of the Polish tax exemption is to ensure fiscal neutrality in relation to direct and indirect investments in securities. The tax exemption at the level of the investment fund avoids double taxation of income both at the level of the fund and at the level of the investors.
69. In response to a written query from the Court of Justice, the referring court stated, however, that the decision to authorise only externally managed investment funds in Poland is based on two reasons: (i) an assessment of the activities of such a fund is to be possible with legal certainty in the Polish legal system and, (ii) the investors’ assets pooled in the investment fund are to be separated from the management company’s asset sphere for reasons of investor protection.
70. In any event, the Polish provisions of the Law on investment funds therefore also aim to limit the investment risk associated with the activities of UCITS for reasons of investor protection. In Poland’s view, only the external management of an investment fund by a management company having legal capacity can adequately ensure the separation of investment assets and the assets of the management company. From Poland’s point of view, that separation of the asset spheres also results in a separation of the investment risks and the economic risks associated with the establishment and management of investment funds.
71. The Polish rules on tax exemptions are directly linked to that decision made in the Law on investment funds. The tax exemptions therefore also serve the aim of investor protection (see, in that respect, also point 81 below). On the basis of that aim, externally managed investment funds domiciled in Poland and internally managed investment funds domiciled abroad are therefore not in an objectively comparable situation. In the case of internally managed funds, investment risks, on the one hand, and insolvency and liability risks, on the other cannot be separated from one another as clearly as they can in the case of externally managed funds.
72. Thus, the main proceedings also differ substantially in that respect from the case of Veronsaajien oikeudenvalvontayksikkö on which the Court delivered judgment. (45) In that judgment, the Court found there was a restriction of the free movement of capital through indirect discrimination as a result of a Finnish provision which differentiated with regard to the taxation of a UCITS according to the type of constituent instrument. Only UCITS constituted under the law of contract, but not under statute, could be exempt from tax. At the same time, however, investment funds could – as in the present case – only be constituted under statute in accordance with Finnish law.
73. However, the Court obviously regarded the form in which an investment fund was established as a mere formality in that case. That is because material aspects, such as those relating to investor protection, which may be associated with the choice of articles of association, were not sufficiently explained in those proceedings.
74. In the main proceedings, by contrast, there is a link between the nature of the management of an investment fund and the investor protection intended by Poland. Therefore, the internal or external management of the investment fund cannot be regarded as a mere formal requirement.
75. Consequently, resident externally managed investment funds and non-resident internally managed investment funds are not in an objectively comparable situation in view of the aim of investor protection pursued by Poland.
3. Conclusion
76. Even assuming indirect discrimination by the association made with the nature of the management of an investment fund, externally and internally managed investment funds are not in an objectively comparable situation in view of the aim of investor protection pursued by the Polish legislature. Therefore, there is no infringement of the prohibition of discrimination.
C. In the alternative: Whether any restriction of the free movement of capital is justified
77. If, on the other hand, the Court were to assume that there is indirect discrimination and an objectively comparable situation, the difference in taxation would in any event be justified. Under Article 65(1)(a) TFEU, the provisions of Article 63 thereof are to be without prejudice to the right of Member States to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to the place where their capital is invested. However, the distinction permitted in that respect under Article 65(3) TFEU does not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments. (46) Therefore, such differences in treatment, which objectively concern comparable situations, is permitted only when they are justified by an overriding reason in the public interest and are proportionate. (47)
1. Whether a reason for justification exists
78. In the present case, it is apparent from the explanations provided by the referring court and from the observations submitted by Poland that the Polish rules on the authorisation and taxation of investment funds – as already stated (see point 69 above) – essentially pursue two objectives: (i) to increase legal certainty with regard to the establishment of investment funds and, (ii) to ensure effective investor protection.
79. The objective of legal certainty alone cannot justify a restriction on the free movement of capital. (48) Otherwise, the Member States would be free to impose such restrictions as long as they are worded unambiguously. (49)
80. The situation is different, however, as regards the objective of effective investor protection. The Court of Justice has already ruled that protection of investors is an objective of general interest pursued by the European Union. (50) The EU legislature also pursued that objective when adopting the UCITS Directive. For example, recital 3 of the UCITS Directive states that the approximation of laws is intended to ensure effective and uniform protection for unit-holders.
81. It is irrelevant that investor protection is guaranteed by tax law in the present case. Although most provisions of tax law serve to finance public budgets, it is acknowledged that tax laws can also pursue other objectives. For example, they can be used to encourage taxpayers to behave in a certain way through targeted tax relief or tax burdens. Accordingly, Poland has only provided for a tax exemption as an incentive to invest in externally managed investment funds, which, in the view of the Polish legislature, provides better investor protection.
82. In addition, the Polish Government stated at the hearing that Article 17(1)(58) of the Polish Law on corporation tax also serves to prevent abuse. Under that provision, closed-ended investment funds – such as the applicant – are at most granted an object-based tax exemption for a portion of the income generated, by way of derogation from Article 6(1)(10a) of the Polish Law on corporation tax, in order to prevent abuse of those funds. However, it is not entirely clear to what extent there is a link between structuring as an open-ended or closed-ended investment fund and the nature of the management. Should such a link exist under Polish law, which is for the referring court to examine, the prevention of abuse which that aims to achieve would also be a recognised reason for justification.
83. Consequently, the objective of effective investor protection pursued by the Polish legislature constitutes an overriding reason in the public interest which may justify any restriction of the free movement of capital.
2. Proportionality of the measure
84. Lastly, the measure concerned – in this case the refusal to grant the tax exemption for income from internally managed investment funds – must be proportionate. This requires that the measure is suitable for securing the attainment of its objective and does not go beyond what is necessary attain it. In that respect, the particularities of the free movement of capital must be taken into account. (51)
85. The refusal to grant the tax exemption for internally managed investment funds is in any event not evidently unsuitable for providing the intended investor protection. As a result of the tax exemption for income from externally managed investment funds, it is more attractive for small investors to be involved in an externally managed investment fund than in an internally managed investment fund.
86. Nor does it seem implausible that the assets of small investors are exposed to lower economic risks in the case of external management than in the case of internal management of an investment fund. That is because – as Poland also argues – the pools of assets are legally separated in the case of external management. Liability and insolvency risks therefore initially only affect the management company having legal personality. The fact that those advantages may be (indirectly) offset by the fact that management fees are charged, for example, does not preclude this. Such fees are more transparent for the investor than the abovementioned risks.
87. An equally but more suitable means is not apparent. Furthermore, the refusal to grant the tax exemption is also appropriate. When weighing effective investor protection, on the one hand, against the free movement of capital, on the other, account must first be taken of the fact that the Member States enjoy considerable discretion with regard to the structuring of investments in investment funds. As already stated (see point 57 et seq.), neither the concept of investment funds under tax law nor the concept of investment funds under investment law is fully harmonised by EU law.
88. In weighing up one against the other, the decisive factor is the importance of investor protection, on the one hand, and the degree of the prejudice, on the other. In that regard, it is necessary to take into consideration the fact the objective of investor protection is not only important for individual market participants, but also has structural market relevance. For example, investors who can rely on a high level of protection for their assets are more likely to invest through investment funds.
89. At the same time, the degree of prejudice is rather low. Internally managed investment funds domiciled abroad are ultimately treated in the same way as all other capital companies. There is no distortion of competition because there are no competing internally managed investment funds domiciled in Poland. The privilege of tax exemption is merely reserved to externally managed (domestic and foreign) investment funds. However, this is justified in view of the better investor protection guaranteed by externally managed investment funds.
90. Furthermore, the provisions of Polish law do not prevent internally managed investment funds domiciled abroad from investing in Poland at all. Poland does not prohibit investments by internally managed investment funds, but merely does not grant them a tax exemption. However, other taxpayers which are not comparable to externally managed investment funds (for example, public limited companies) are not entitled to such an exemption either.
91. Lastly, there is no general right under EU law to be exempted from taxation by a Member State because another Member State (in this case Luxembourg) authorises other ‘legal forms’ in its legal system. In that case, it depends rather on a comparison of legal types. It is for the referring court to examine whether, in the context of the comparison of legal types, it was assumed without error of law that foreign internally managed investment funds correspond to ‘normal’ capital companies under Polish law (see point 50 et seq. above).
3. Interim conclusion
92. The objective of effective investor protection pursued by Poland constitutes an overriding reason in the public interest. A tax exemption only for externally managed domestic and foreign investment funds is also suitable to ensure the attainment of that objective and does not go beyond what is necessary and appropriate to attain the objective. Therefore, if it were to be assumed that there is an impairment of the free movement of capital, that restriction would consequently be justified in any event.
VI. Conclusion
93. I therefore propose that the question referred by the Wojewódzki Sąd Administracyjny w Gliwicach (Regional Administrative Court, Gliwice, Poland) be answered as follows:
Article 63(1) TFEU must be interpreted as not precluding national legislation which provides for an exemption from corporation tax on the income of investment funds only for externally, but not internally, managed investment funds, provided that investment funds domiciled at home and abroad are not treated differently. There is no indirect discrimination if national investment law does not authorise the establishment of internally managed investment funds and therefore the tax liability of income from internally managed investment funds only affects internally managed investment funds domiciled abroad, which are then taxed in the same way as all other corporations.