A family foundation is a new legal entity in the Polish law system aimed at facilitating the succession of family business. Its tasks are to protect, manage and increase the family estate (property) and provide benefits for beneficiaries according to the founder's will. The Act on Family Foundation comes into force on 22nd of May, 2023.
Establishing a family foundation
A family foundation can be established by a natural person either by drawing up a founding act before a notary or by a will. It should be registered in the family foundations register.
Beneficiaries of the foundation can be the founder, natural persons (not only family members), and non-governmental organizations. The founder determines who will be the beneficiary and under what conditions.
The initial capital of the family foundation amounts to PLN 100,000. The contributions can take the form of cash, shares in companies, real estate, securities, etc. The foundation is the owner of the entire estate - there are no shares in the foundation.
Taxation of a family foundation
The law provides for favorable taxation of family foundations, allowing for tax-efficient multiplication of family assets. The total tax burden for the foundation and beneficiaries in certain cases may amount only to 15%.
Transfer of assets
The establishment of a family foundation is generally tax-neutral for both a founder and beneficiaries. Unlike a limited liability company (LLC), contributions to a foundation are not subject to tax on civil law transactions. Also, the founder does not have to recognize the income from the contributions in kind made to the foundation, as it is the case with such contributions made to an LLC.
It should be noted however that in certain cases the obligation to pay VAT may arise (e.g. when transferring a company real estate that cannot benefit from VAT exemption).
Taxation of profits
The family foundation’s profits are generally non-operational in nature. The main purpose of a family foundation is to generate passive income, for example through dividends from family companies. Nevertheless, a family foundation can conduct business activity in a limited scope - for example it can rent out real estates, buy and sell shares and securities, or grant loans to related entities.
The income generated from the allowed activities is generally exempt from CIT at the time it is obtained. Taxation at 15% CIT rate occurs only when profits are paid out to beneficiaries. It means that if a family business owner contributes shares in a family company to the foundation, dividends received by the foundation from that company will not be taxed if they are intended for investment (not paid out to beneficiaries).
The tax rules applicable to a family foundation are therefore similar to those that apply to the company under so-called the Estonian CIT regime (tax deferral). In this regard it should be noted that the provisions do not allow a family foundation to have shares in companies taxed with the Estonian CIT. A person having shares in the Estonian CIT company can however establish the family foundation with assets other than shares in this company or have a status of a family foundation’s beneficiary.
Tax risks
There are certain tax issues that one should watch out for when creating and running a family foundation.
First, it should be noted that the income obtained by a family foundation from business activity other than explicitly permitted in the provisions is subject to a tax rate of 25%.
Then, there are also so-called "hidden profits". The transfer of benefits qualified as hidden profits entails the obligation to pay 15% CIT by a family foundation (on a current basis). These benefits include among others: benefits paid out by the foundation to related entities (e.g. beneficiaries, founder, family company) other than the benefits specified in the founding act, unreturned loans obtained by related parties, interests from loans granted to the foundation by related parties or benefits for providing certain intangible services (e.g. management, advisory services).
Another exception from preferential CIT treatment of the foundation pertains to the income generated from renting / leasing assets to the related entities that are used by them for business activity. This income is subject to 19% CIT taxation at the time it is obtained. The aim of this exception is to avoid abusing the family foundation provisions for tax optimization (e.g. transferring the family enterprise to the foundation and then leasing it back to carry out family business with the tax benefit of increased tax costs and no tax on the level of the foundation).
Taxation of beneficiaries
Taxation of the transfer of assets from a family foundation to a beneficiary depends on the beneficiary's status. If a beneficiary is the founder's closest family (individuals from the "zero" tax group), receiving payment/other benefits from a family foundation is exempt from PIT and from inheritance and donation tax. In such a case, the only tax burden amounts to 15% CIT paid by a family foundation. Beneficiaries outside the closest family circle should pay 10% (distant family) or 15% PIT (other people).
It is worth noting as well that payments from a family foundation are not subject to social and health insurance contributions, nor solidarity levy.
All things considered, a family foundation is an interesting solution for owners of medium-size or large enterprises. It facilitates the succession of family business and helps to secure the family assets. It can also bring tax savings.