CE Financial Observer: On the Polish streets we see the signs of the French Carrefour and the German Rossmann, but it turns out that the biggest foreign investor in Poland in 2014 was the Netherlands, with a share of 17.2 per cent. Where did this result come from?
Jacek Kocerka: This results came from the fact that companies registered in the Netherlands often act as a an intermediary in the transfer of capital from a third country. And this is a common policy of corporations which invest in Europe through companies registered in the Netherlands. This is done for tax purposes. But if we take a look at where this capital originally came from, then the Netherlands fall to the fourth place in the ranking of foreign investors in Poland. The first place is taken – as intuition would suggest – by Germany which invested in assets currently worth EUR29bn in Poland. France is ranked second with assets worth EUR18.5bn, the US is placed third with investments worth EUR17.3bn, followed by the Netherlands with close to EUR13.3bn.
What do these figures mean in practice?
This is the value of all investments at the end of a given year. This means that if, for example, the German investors wanted to withdraw from Poland in December 2014, their investments at that time would be worth a total of EUR29bn. In total the value of all foreign investments exceeds EUR161.5bn.
It seems that very few want to withdraw, since the ratio of reinvested profits is as high as 46 per cent.
That is correct. According to the United Nations Conference on Trade and Development (UNCTAD), Poland is the 20th most attractive investment destination in the world, and investors keep almost half of what their companies have made in a given year for further development. They are therefore linking their future with the Polish market. There is nothing strange about that if we consider the levels of profitability that can be obtained.
The profitability figures, however, are surprising – industrial processing brings almost 12 per cent per year, trade over 10 per cent, whereas financial and insurance activity only 6 per cent. Does this mean that Polish banks were not as profitable as was commonly believed, even in 2014?
They were profitable, especially compared to the banks in Western Europe. However, it turns out that in Poland there are areas even more profitable for foreign businesses. I have to admit that I was also a bit surprised by this result and I don’t really know how to explain it. The working hypothesis is that industrial processing and trade in Poland are very efficiently organized. This is confirmed by other studies, which indicate that entities which have a foreign investor are generally doing better – they generate more profits, export more, etc.
What are the costs, however, associated with a model of growth based on foreign capital? The amount of EUR20.7bn per year is often repeated in the public debate. Is this confirmed by statistics for 2014?
Here we are moving beyond direct investments, which are covered by the report. Indeed as we look at all the investments of foreign entities in Poland, then the income of the foreign companies amounts to EUR18-20.7bn per year. Most of that is the income of direct investors. In 2014, it amounted to over EUR14.3bn, that is about 5 percent of GDP. This also included dividends exceeding EOU6.7bn, interest on loans amounting to almost EUR1.8bn and reinvested profits reaching EUR5.7bn. An amount of EUR5.7bn, however, stays in the country. Companies buy machines, buildings and employ people with that.
If we move beyond direct investments, then there is also income from portfolio investments, including mainly interest on Treasury bonds, which gives an additional EUR4.6bn, as well as income from remaining investments. So in 2014 it was more than EUR20.7bn in total. I’d like to emphasize once more that EUR5.7bn from that amount did remain in Poland.
Will the bank tax and the retail chain tax put the profitability of investing in Poland into question?
I will not speculate on that – I can only present the data. Profits of foreign entities from the financial sector amount to about EUR2.3bn per year. The government is estimating that the bank tax will bring in EUR924m and some of that will also be paid by Polish investors, so this whole amount will not be borne by foreign entities alone. Simple maths shows that the profitability of investments in banks will fall, but not to zero. In the case of retail chains the profitability margin is even greater, but in this case we do not yet know the whole draft legislation, so it is hard to provide reliable calculations.
The regional breakdown of foreign investment is striking. The Mazowieckie Voivodship with EUR94.7bn is far ahead of the Silesian Voivodeship with close to EUR16.pbn and the Greater Poland Voivodeship with EUR12.9bn.
This is what the statistics show, but in reality this disparity is smaller. It is often the case that the investments flow into a company registered in Warsaw which is just building a factory in another part of Poland and we simply don’t have good methods to measure that. Even if we include this factor, however, the advantage of the Mazowieckie Voivodeship, and in reality that of Warsaw, remains very big.
The other side of the coin are Polish investments abroad, which exceeded EUR23.1bn in 2014. How much of that accounts for genuine expansion of domestic companies, and how much is due to tax optimization in Cyprus, Luxembourg, Switzerland and the Netherlands?
The scale of tax optimization is substantial. Polish residents have invested EUR2.2 in Cyprus alone. This is a phenomenon occurring all over the world and it is difficult to fight with. Let me give just one example – when the agreement on the avoidance of double taxation between Poland and Cyprus was amended, which curtailed the practice of the fictitious calculation of dividend tax by Cyprus-based companies for Polish companies, it turned out that a new chain was created, in which the new central link were companies registered in Slovakia. The creativity in seeking this type of solution is enormous.
Who’s looking for them? Large private companies, or those with the participation of the State Treasury? Even from the announcements of KGHM it seems that above KGHM International, which is investing in Chile, there are three other companies registered in Luxembourg.
I don’t want to point to specific examples, but we can say in general that almost every Polish company investing on a large scale overseas has to somehow address the issue of optimization. I must stress, however, that this is not synonymous with avoiding taxation in Poland. Sometimes it is the case that the same income can be taxed up to three times in Europe. Therefore, I cannot rule out that there are companies that shape their structure in such a way that their income is not taxed in two other countries, but that it is taxed in Poland instead.
Luxembourg seems to be the future for some companies in general. Polish investment funds declared openly that if the bank tax covered them, they would move there and operate in a better environment.
This is already happening. A Polish customer can buy mutual funds operating in Luxembourg at the cash desk of a Polish financial institution. This creates certain problems for us due to statistical reasons – in estimating, for example, the level of savings of Polish households, but it is nonetheless technically possible.
And will the banks themselves be able to avoid the bank tax this way?
This is theoretically possible. The alternative to loans in Poland could be, for example, a loan in the foreign parent bank. It is already the case that Polish enterprises are obtaining financing abroad on a large scale, not least because some of them are too big to be financed solely within Poland. As a result, according to the data in the report, companies owned by foreign direct investors have already contracted loans worth PLN 165 billion and this figure represents half of the loans contracted in Poland, which amounted to PLN 330 billion in total.
Jacek Kocerka is the head of division in the NBP Department of Statistics and the co-author of the report „Foreign direct investments in Poland and Polish direct investments abroad in 2014”.