Close-end investment funds

Functioning of Closed-end Investment Funds in Poland is regulated by the Polish law, in particular by the Investment Fund Act and other related implementing regulations. The act states that the sole subject of activity of funds involves investing financial resources, collected by offering the purchase of investment certificates in, as specified in the act, securities, monetary market instruments and other property rights. Proposal of purchase investment certificates can be made through public offering (directed to unspecific receiver) or private offer (directed to not more than 149 investors).

Investment funds association

Closed-end Investment Funds are established by Investment Funds Associations with the task of managing the Funds and function as a body representing a given Fund in all legal relationships with the third parties. Investment Funds Associations are legal persons, and their activity is strictly supervised by the Financial Supervision Authority, which is the state financial supervisor. This ensures transparency of Associations and their compliance with all legal regulations and best market practices.

Functioning principles of closed-end investment funds

It should be stressed that, despite the fact that the basic legal act regulating establishment and functioning of Closed-end Investment Funds is the Investment Fund Act,, other regulations are very often applicable for their activity, for instance, the Act on public offering, conditions governing the introduction of financial instruments to organized trading and public companies, or the Act on trading with financial instruments.

The basic document that regulates the principles of operation of a given Closed-end Investment Fund is its statute, which is agreed before a notary that being a state official ensures additional security of the entire process) at the time of establishing the Fund by the Investment Funds Association. In compliance with regulations of the Investment Fund Act, the fund participants are not liable for its commitments. After establishment of the Fund, it is registered by the Association in the National Court Register, which verifies all documents in terms of their compliance with legal requirements. In the case of a positive result of verification, the Fund is introduced into a generally accessible register of investment funds, where everybody can access basic information concerning a given fund. Public access is yet another factor ensuring transparency of the establishment and registering process of Closed-end Investment Funds. At the time of forming of the fund, the first series of investment certificates are issued. The certificates are purchased by the investors in return for certain assets and financial resources. Investment certificates are documents confirming the title of participating in a given Closed-end Investment Fund. They give the right to participate in assemblies of investors, and increase their value results from the increase of value of investments completed by a given fund.

Emission of new certificates and resulting acquisition of new financial resources or other assets requires a resolution of the investors assembly. In this way new investors can join the Fund and acquire benefits from the implemented investments. At the same time, it is possible to purchase investment certificates from the existing Fund participants, provided that the statue of the Fund does not include restrictions in this matter. In order to ensure full security of transactions within the frames of the proposed cooperation, transfer of any financial resources will always be performed by means of two globally accepted international banks.

Evaluation of certificates

In conformity with the Investment Fund Act, valuation of certificates must be performed periodically at the day of valuation, which means – at least quarterly. Additionally, valuation should be made in sufficient advance, also before the date of commencement of subscriptions for new certificates and on the day of purchase of the certificates. The performed valuations are verified by a Depositary that in most cases represented by a large bank which has a department specialising in servicing of investment funds. Valuation of certificates is performed in two stages. During the first stage a net value of assets of a given Fund is determined on a selected day of valuation. For this purpose the value of Fund assets is reduced by its commitments. In turn, during the second stage, the result is divided by the total number of investment certificates issued until the day of valuation.

Permitted investments

Closed-end Investment Funds are allowed to implement investments consisting in purchase of various classes of assets. Among others they include: securities, derivatives, real properties, and also liabilities. It has to be stressed that the Investment Fund Act imposes restrictions on funds that prevent concentration of all fund assets in a small number of investments. Thus, the investment policy of each fund must assume placement of acquired financial resources in at least 5 independent investments. There are no limitations regarding concentration of funds in a given class of assets, but they cannot be instruments of the same entity. One of the main benefits of investment execution through Closed-end Investment Funds are the matters connected with tax optimisation. By virtue of the act on income tax, investment funds are excluded from corporate income tax. As a result, it is possible to accumulate the income from investments without the need to pay 20% of earnings annually in the form of tax. The income is taxed only at the moment of sale of investment certificates by a given Fund member. However, it is possible to form a structure which allows minimising fiscal burden.

Withdrawal from investment

The basic way of withdrawal from the Closed-end Investment Fund is a submission of a request to redeem investment certificates. Any and all regulations regarding the course of this process, including the buyout procedure and time-limits when it can be performed should be included in the statue of a given Fund. At the time of buyout, certificates are redeemed by law. The statue should regulate the manner of transferring financial resources from buyout of certificates to the fund participants. Resale of the owned certificates to third parties, interested in purchasing them, is an alternative solution. Any income of investors result from the increase of investment certificates value and the resulting difference between the purchase price and the sale price. Within the offered cooperation we encourage specialisation of the established Closed-end Investment Funds. It consists in concentration of investments executed under a given fund in a given economy sector or a selected industry. This allows concentrating specialists from a given field under one Fund. They provide support to those, who are managing the Fund, which has a positive impact on the results from investments achieved by the Fund. At the explicit request it is possible to create a mixed Closed-end Investment Fund.

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