February 2025 marked a turning point for cross border investment funds in the European Union (EU). The Court of Justice of the European Union (CJEU) has ruled that a key condition under Polish tax law—requiring non-resident investment funds to appoint an external management company in order to qualify for a withholding tax exemption—violates EU law.
This landmark decision not only unlocks refund opportunities for self-managed (internally managed) funds investing in Poland but also signals a broader shift in how the EU treats overly narrow, “domestic-only” tax rules.
Background: The Polish Restriction
The CJEU Verdict: Discriminatory and Unjustified
Why This Matters: A Consistent Line from the CJEU
Implications for Internally Managed Funds
Background: The Polish Restriction
Poland’s domestic tax law allows EU/EEA investment funds to claim withholding tax exemptions on dividends and interest income —provided they meet certain conditions. One key requirement is that the fund is managed by an external management company which is authorised by a competent financial market supervisory authority.
The rationale behind this rule is rooted in the fact that all Polish investment funds must appoint external managers by law, and as a result, Polish funds automatically meet this condition to exemption. Foreign funds, however, are subject to their country of residence’s structuring rules, meaning internally managed funds, although operating within the framework of EU and domestic law, are often disqualified.
This condition, while it appears neutral, placed foreign internally managed funds at a disadvantage and has sparked controversy over the years. Critics argued that it unfairly discriminates against internally managed funds based in other EU countries, potentially violating the EU’s principle of free movement of capital as enshrined in the Treaty on the Functioning of the European Union (TFEU).
This exemption applies to both EU/EEA and third-country investment funds. Although the Polish exemption was originally limited to EU/EEA investment funds, CJEU precedent has extended its scope to qualifying third-country funds. In the earlier 2014 CJEU ruling regarding a U.S. regulated investment company, it was found that such a restriction breaches the free movement of capital, meaning third-country funds must also be eligible for the Polish tax exemption if they meet the same substantive conditions.
The CJEU Verdict: Discriminatory and Unjustified
On 27 February 2025, the CJEU delivered a significant judgment concerning Poland's tax exemption policy for foreign investment funds. The case involved a Luxembourg specialised investment fund that was internally managed and authorised under the AIFM Directive. Despite meeting all other exemption requirements, the Fund had was denied the exemption under Polish tax rules.
The CJEU’s finding was clear that the Polish requirement for non-resident investment funds to appoint an external management company in order to qualify for a withholding tax exemption is incompatible with EU law.
- Discriminatory Treatment
The CJEU found that this “external management” condition amounted to discrimination and a restriction on the free movement of capital, as protected under Article 63 of the TFEU, on the basis that Polish law only allows for investment funds to be externally managed.
Although framed as an objective criterion, the rule was effectively tailored to the domestic market—since Polish law only permits externally managed funds, the rule created a barrier that only foreign funds could fail to meet and making it virtually impossible for foreign internally managed funds to qualify.
- Objective Comparability
The comparability of a cross-border situation must be considered in the light of the aim and purpose of the domestic provisions in dispute. The CJEU confirmed that internally managed foreign funds are comparable to Polish funds for the purpose of the exemption, as both operate under regulatory supervision for the purpose of collective investment. It rejected the notion that differences in management structure justifies unequal treatment, noting that the rule appeared designed to exclude foreign funds, particularly given that Polish law prohibits self-managed structures.
- Rejected Justifications
The CJEU also dismissed Poland’s justification that the external management requirement served investor protection. The CJEU found no overriding public interest or regulatory reason to deny tax relief solely based on a fund’s internal management structure.
Why This Matters: A Consistent Line from the CJEU
This judgment continues a clear trend from the CJEU in that rules that rely on “objective” but market-specific conditions—such as legal form or management structure—will not stand if they disproportionately impact non-residents. The message is simple: if a condition is designed around the domestic market, and foreign funds are inherently less likely to meet it, it risks being struck down
The Polish exemption was just one example. Across the EU, tax rules that impose “form-over-substance” requirements—like external management mandates or legal-structure tests—are increasingly vulnerable under EU law. This ruling affirms the right to equal access to tax relief, regardless of how a fund is structured or managed.
This ruling reinforces the CJEU’s consistent stance that seemingly neutral conditions can be just as restrictive as explicit residence requirements when they act as de facto barriers. From a withholding tax perspective, it broadens the scope for reclaim arguments across the EU—challenging exemption criteria that unfairly favour domestic structures over comparable foreign funds.
Implications for Internally Managed Funds
This ruling is significant for internally managed investment funds with cross-border investments in Poland, as this decision clarifies that the objective criteria regarding the form of management taken by the fund should not impact its access to benefit from the withholding tax exemption available to foreign investment funds where they can demonstrate that all other conditions are met.
While this issue has typically required extensive litigation, this ruling may open the door to faster refund processes for internally managed investment funds, potentially reducing the need for lengthy legal disputes.
Internally managed funds should revisit their Polish-sourced income and determine whether claims are viable, particularly in light of any applicable limitation periods.
For detailed information on the impact of the recent ruling, we encourage you to promptly get in touch with WTax’s regional specialists
