On February 6, 2023, the President of the Republic of Poland signed the long-awaited act on family foundations, introducing the institution of a "family foundation" into the Polish legal order.
By assumption, the introduced legal and tax solution is to be a real support for family businesses in planning and carrying out succession processes.
The Act was announced in the Journal of Laws on February 21, 2023, with the new provisions to come into force three months after the date of publication.
The essence of the family foundation
Pursuant to the Act, a "family foundation" is a legal person established to collect property, manage it in the interest of beneficiaries and provide benefits to beneficiaries .
The explanatory memorandum to the draft Act shows that the main purpose of introducing a Family Foundation into the Polish legal system is to enable the management of the assets of the inherited company and to ensure protection against fragmentation of the assets created in connection with the conducted business activity after the succession. The family foundation is to allow the family character of the run enterprise to be fully preserved.
The family foundation is to be a legal tool facilitating multi-generational succession, so that it is possible to maintain the developed family property in the hands of subsequent generations and continue the business in the long term.
In addition to the above advantages, the tax benefits associated with it will also be important for the selection of a family foundation as an instrument for planning family succession.
Principles of taxation of a family foundation
The Act introduces a number of changes to tax regulations, e.g. in the field of PIT, CIT and inheritance and donation tax, which form the rules of taxation of the Family Foundation:
- inheritance and gift tax
The transfer of ownership of things or property rights between the beneficiaries and the Family Foundation itself will be exempt from inheritance and donation tax. Possible taxation in this respect may, however, occur on the basis of PIT or CIT.
- corporate income tax (CIT)
- for subjective exemption
The Act states that the Family Foundation will be subjectively exempt from CIT.
This means that, in principle, the proceeds from the current activities of the Family Foundation will be exempt from CIT, to the extent indicated in Art. 5 of the Act, which would normally result in the need to settle the tax, such as, among others: dividends, interest on loans granted to beneficiaries or rental income.
The property contributed to the Family Foundation will also not be subject to CIT.
It is worth mentioning that if the shares of a general partnership are transferred to the assets of the Family Foundation, the general partnership will cease to be a tax-transparent entity and will become a CIT taxpayer.
However, the Act provides for exceptions from the subjective exemption relating to:
- economic activity beyond the scope indicated in art. 5 of the Act,
- the tax on income from buildings referred to in Art. 24b of the CIT Act and
- tax for the provision of benefits to the founder or beneficiaries referred to in Art. 24q of the CIT Act.
In connection with the above, the undertaking by the Family Foundation of economic activity in a scope other than that indicated in art. 5 of the Act, will make it necessary to tax this type of activity at the sanctioning 25% CIT rate. Moreover, the family foundation will not be able to take advantage of tax preferences available to other CIT taxpayers.
This exemption will not apply to activities related to the sale of property acquired solely for the purpose of further disposal.
Revenue from buildings has also been excluded from the CIT exemption, provided that the conditions for the creation of a liability in this respect specified in Art. 24b of the CIT Act.
- distribution of benefits or property
If none of the other exceptions occur, the CIT taxation of the Family Foundation will occur only at the time of distribution of benefits to the beneficiaries or property from the dissolution of the Family Foundation.
Distribution from the Family Foundation will be subject to a 15% CIT rate on the value of the benefit or property, and in the case of property from the dissolution of the Family Foundation, this value may be reduced by the tax value of the property contributed to the Family Foundation, as defined in the Act.
Notwithstanding the above, at the stage of payment of benefits or property to the beneficiaries of the Family Foundation, PIT taxation may also occur.
- personal income tax (PIT)
The method of taxation of the beneficiaries depended on the degree of kinship with the founder.
If the benefit from the Family Foundation or property in connection with the dissolution of the Family Foundation will be obtained by:
- the founder or the persons closest to him belonging to the so-called zero tax group - i.e. by the founder's spouse, his children, grandchildren and further descendants, parents, grandparents and further ascendants, stepson, siblings, stepfather and stepmother - this is income earned
on this account will be exempt from PIT,
- other persons not mentioned in point a) - income will be taxed at the 15% PIT rate.
However, it should be remembered that if the Family Foundation has more than one founder or if property is contributed to the Family Foundation by entities other than the founder or his spouse, descendant, ascendant or sibling, the PIT exemption will be granted in the proportion corresponding to the proportion contributed by such founder of property to the Family Foundation.
- Tax Code
The family foundation will be liable with all its assets jointly and severally with the founder for tax arrears of this founder that arose before the establishment of the family foundation. This liability will be limited to the amount contributed. However, it will not only apply to tax arrears related to the contributed property, but will apply to any tax arrears of the founder.
Disadvantages of the Family Foundation
From the perspective of tax law, the institution of the Family Foundation is not a solution free of defects. In this regard, the following can be mentioned, for example:
- different taxation of beneficiaries of family foundations established by one founder and those established by several founders - in order to apply full exemption, taxpayers may resort to creating separate family foundations, in which the founder and beneficiaries will be only persons belonging to the so-called zero tax group;
- it is not possible to combine a family foundation with the "Estonian" CIT - the founder and the beneficiary cannot be partners in a company that intends to use the "Estonian" CIT;
- lack of facilitations for entrepreneurs transferring assets from foreign foundations to a family foundation;
- lack of precise VAT taxation rules for the Family Foundation, which may result in doubts regarding the status of the Family Foundation as a VAT payer and the right to deduct VAT.
At first glance, a family foundation seems to be a very tax-friendly solution, although it is not without its disadvantages and risks.
It cannot be ruled out that some entities will use the Family Foundation only because of the resulting tax benefits, and not strictly for family succession planning, which of course may involve the risk of being accused of using this institution as a tax optimization instrument and an attempt to apply the provisions against tax avoidance. In turn, in the longer term, this may force the legislator to introduce solutions limiting these benefits, especially if the scale of these activities is large.
However, for what purposes the Family Foundation will actually be used will depend primarily on the taxpayers themselves, but also on tax advisors, and specifically on whether and under what circumstances they will recommend this solution to taxpayers.
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