The Court of Justice of the European Union (CJEU), in its ruling C-18/23 on 27 February 2025, established that the Polish tax exemption for externally managed nonresident investment funds violated the free movement of capital under EU law.

Under Polish law, all domestic funds are exempt from corporate income tax. The Polish Tax Code also exempts corporate income tax on Polish-generated income for open-ended funds (UCITS) and other non-UCITS investment funds, including specialised and closed-ended funds, based in an EU or EEA jurisdiction. However, these funds must be managed by entities authorised by the financial market supervisory authorities of the state where the manager is externally managed). Under Polish law, establishing internally managed investment funds is not allowed.

A Luxembourg investment fund, managed internally by its board of directors and registered as an alternative investment fund manager, sought a tax exemption for income generated in Poland. After being denied by Polish tax authorities, the fund pursued legal action, leading the Regional Administrative Court to refer the case to the CJEU to assess the compatibility of Polish law with EU fundamental freedoms.

The Advocate General’s opinion on 11 July 2024 stated that the Polish tax exemption did not restrict the ree movement of capital, as it applied regardless of the investment fund’s domicile and did not cause indirect discrimination.

The CJEU ruled that the Polish tax exemption violated the free movement of capital. The CJEU stated that the Polish law exemption did not constitute direct discrimination, as it wasn’t based on the fund’s residence. Nonetheless, the court found it could lead to indirect discrimination because the tax exemption depends on conditions tied to the national market, which favoured resident operators over nonresidents.