Alternative Investment Companies (ASI) are an increasingly popular investment tool among people looking for alternative sources of profit. One of the key issues that affects the profitability of such investments is the taxation of profits. What are the forms of taxation of ASI? We answer in the article.
Table of Contents
- Alternative Investment Company – what is it?
- The subject of AIC allowed by law
- Alternative Investment Company – advantages and disadvantages
- Alternative investment company – taxation of profits
- Tax preferences for AIC
Alternative Investment Company – what is it?
According to a legal definition from the Act on Investment Funds and Alternative Investment Fund Management, an AIC is one of the forms of an alternative investment fund. It differs from a specialized open-end investment fund and a closed-end investment fund.
The subject of AIC allowed by law
The only subject of AIC’s activities (apart from exceptions specified in the Act), is to collect assets from multiple investors for the purpose of investing them according to their interests. It must be pursued in compliance with a specific investment policy.
An AIC cannot simultaneously engage in such operations and conduct other business activities. Only an AIC that is internally managed can combine the activities of the ASI and the ASI Manager.
Alternative Investment Company – advantages and disadvantages
An alternative investment company has its advantages and disadvantages. You should consider them before making an investment decision. Below we present a few of them:
Advantages of alternative investment companies:
- Potentially higher profits. Alternative financial instruments, such as real estate, art, or hedge funds, can bring investors higher profits than traditional financial instruments.
- Diversification of the investment portfolio. Investing in alternative financial instruments allows for portfolio diversification and minimization of risk.
- Access to advanced investments. AICs allow investors to access investments that are usually available only to large investment institutions.
Disadvantages of alternative investment companies:
- Higher investment risk. Investments in alternative financial instruments are usually riskier than traditional financial instruments. Market changes can affect the value of investments and cause losses.
- High costs. Investing in alternative financial instruments like real estate can bring high costs. They may include property taxes, maintenance costs, as well as repair costs.
- Limited liquidity. Alternative investment companies often have longer investment periods and may have limited liquidity. This means that investors may have difficulty withdrawing their funds before a specified time.
It is also worth remembering that alternative investment companies are intended for investors with greater knowledge and experience in investing. Consequently, they are willing to take greater risks to potentially achieve higher profits.
Alternative investment company – taxation of profits
The taxation of an alternative investment company depends on its legal form and investment structure. Usually, an AIC has the structure of a “pure” investment company. It means that its profits are taxed at the company level and then paid out to investors in the form of dividends or capital gains. In Poland, the income tax rate on capital gains is 19%. On dividends, it amounts to 19% or 5%, depending on the investor’s tax situation.
An AIC can also be registered, for example, as a limited joint-stock partnership company (S.K.A.) or a limited liability company (sp. z o. o.). In the case of S.K.A., investors are only liable up to the amount of their contribution. Profits and losses are subject to taxation at the investors’ level, who also bear the tax costs. As for an LLC (sp. z o. o.), the tax is calculated at the company level, and profits are paid out as dividends to investors.
In any case, before deciding to invest in an AIC, an investor should consult their tax situation with a specialist. You can consult a tax advisor or accountant, to understand the tax results of the investment.
Tax preferences for AIC
The Corporate Income Tax Act provides for an exemption for certain income obtained by AICs. It concerns the following cases:
- According to Article 17(1)(58a) of the CIT Act, only income from the sale of shares or stocks is subject to an exemption, provided that the alternative investment company selling the shares (stocks) held directly and continuously for a period of at least 2 years not less than 5% of the shares (stocks) in the capital of the company whose shares (stocks) are being sold. NOTE! The above exemption does not apply to income (revenue) obtained from the sale of shares (stocks) in a company if at least 50% of the value of the assets consist – directly or indirectly – of real estate located in Poland, or rights to such real estate
- In the case of AICs in the form of capital companies, it is also possible to benefit from dividend exemption. This results from Article 22(4) of the CIT Act, provided that the conditions for this exemption are met. Namely, if an AIC holds at least 10% of shares/stocks in the company continuously for a period of 2 years.
- As a financial enterprise, alternative investment companies are not subject to the regulations in Article 15c of the CIT Act. This concerns recognizing debt financing costs as tax-deductible costs. Thus, AIC may include all costs (i.e. interest, commissions) related to obtaining debt financing as tax-deductible costs. Moreover, there is no need to respect statutory limits. This is significant business facilitation.
The choice of an alternative investment company (AIC) may be a good solution for many people. Especially for those who value limited obligations, lower operating costs, or preferential tax rules. AIC is also subject to less supervision by the Financial Supervision Commission (KNF). Its functioning is not only significantly cheaper but also less complicated. This results for example from the lack of involvement of the Investment Fund Society in its management and service.
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