22nd of May 2024 marks exactly one year since the existence of the family foundation in the Polish legal order. During this time, entrepreneurial interest in this institution has remained high, and even increased significantly over time. Last year alone, more than 700 applications for family foundation registrations were filed, and in the first four months of 2024 – at least as many. This success of the family foundation is due to the fact that entrepreneurs have been quick to recognize the family foundation as an instrument through which they can provide economic security for their beloved ones without the need to spread their accumulated wealth. And to separate business from family relationship issues.
Tax aspects extremely relevant
Tax preferences undoubtedly encourage the establishment of family foundations. After all, at the very beginning, the contribution of assets to such an entity is neutral in terms of income taxes, as confirmed by the Director of the National Fiscal Information in individual interpretations. In particular, however, fiscal benefits may be associated with the use of the foundations in question for business activities. This is because the foundation, if its business activity falls within the limits of the law, is subjectively exempt from income tax. However, when considering the use of the described legal entity, one should first analyze how the distribution of goods by the foundation towards its beneficiaries will look like. Much will depend on their personal characteristics. For as long as the beneficiary is in the so-called zero tax group with respect to the founder(s), the benefits received by him/her from the foundation will be taxed only with 15% income tax (CIT in Poland) and that paid by the foundation itself. When, on the other hand, the benefits are paid to extended family or people unrelated to the founders of the legal entity, then these people will pay an additional 10 or 15% PIT income tax on the value of such benefits. Thus, the aspects of the relationship to the founder, but also of who contributes assets to the family foundation (because it does not necessarily have to be the founder himself) are extremely important to achieve the effect of tax benefits. Proper planning of these transfers (today and “tomorrow”) is a major part of the advisors’ work.
Allowed activities of family foundations
From the perspective of the effectiveness of the fiscal burden, it is important for the foundation to carry out activities within the range “permitted” by the act. Such terminology does not mean, however, that activities carried out outside the areas listed in the act are illegal or invalid – they will simply be much less profitable in practice. The above-mentioned catalog of permitted business activities is not overly broad, but includes, among other things, the purchase and lease of real estate, the purchase and sale of securities or shares, and the conduct of agricultural activities. Conducting business in excess of the signaled list will result in the payment of a 25% sanctioning tax on such income.
In interpretations issued over the past year, the authorities have pointed to a wide variety of activities that, in their view, do not fall within the range preferred by the legislature. Some of these positions may come as a surprise, while others confirm the fiscal authorities’ adherence to the literal wording of tax regulations. For example, according to the tax administration, short-term rental of real estate is not included in the list of “permitted” activities, nor is trading in cryptocurrencies. Generalizing – perhaps in an exaggerated way – the foundation appears rather as a passive investor managing long-term accumulated assets, while business activities “not accepted” by the legislator and requiring greater dynamics can be carried out through other legal entities (while their inclusion in the structure created by the foundation can still be, for many reasons, beneficial).
In order to avoid unpleasant surprises, one must additionally be careful when creating civil-law relations of beneficiaries with the family foundation, which form the basis for paying the former with funds from the said legal entity (e.g., interest on loans granted to the foundation). This is because by “coincidence” it is possible to create a tax liability on the part of the foundation for the payment of so-called hidden profits. So far, this is how the remuneration for the provision of rental management services for the foundation’s real estate, paid by the foundation to a related entity, has been classified – in the interpretation of the tax authorities.
The statute is key
It is said that succession must be tailored. But the statute of a family foundation must be tailor-made for this succession – it is a document that sets the rules for the organization and operation of the family foundation now, when the founder (or founders) usually has (have) an overwhelming influence on the foundation, and in the future, when the founder (or founders) will be gone and his (their) descendants will have to cooperate to make the whole function as well as possible, in according to the goals that guided the establishment of the foundation. It will require a great deal of thought on the part of the founders to arrange in the statute the relationship of the family foundation’s organs or individuals, e.g. the founders themselves when there are several of them, or the founder’s descendants (who, by the way, may be given significant personal powers from the very beginning to, among other things, shape the composition of the foundation’s organs), in such a way as to minimize the risk of decision-making paralysis in the family foundation as much as possible.
The founders are entitled to determine the initial content of the family foundation’s statute and have a great deal of freedom in determining both the rules of the foundation’s management, its operation and the purpose for which it is established. And also the circle of beneficiaries. And it is worthwhile, in this regard, when working on the draft statute of a family foundation, to reach far “beyond the horizon”, bearing in mind that the family situation may change, so that – by giving only a small circle of people the opportunity to obtain such status – it does not result in a family foundation being left without potential beneficiaries in the future.
Undoubtedly a great concept
Although numerous risks may be encountered in the establishment and operation of a family foundation, this should not obscure the fact that from a tax and operational perspective, a family foundation currently remains as the best tool for the long-term accumulation and safeguarding of entrepreneurial assets. And, for the most part, such various pitfalls may be avoided if the process of establishing a family foundation is approached in stages, giving oneself adequate time for reflection, but also for conducting in-depth, sometimes supported by requests for individual tax interpretations, legal and tax analyses of the planned scope of the family foundation’s activities.
The authors of the article are Karol Szymański (managing partner), Piotr Letolc (partner)
