A new type of entity, i.e. the family foundation, will appear in the Polish legal system in May. It has been operating in the countries of Western Europe for a long time, and we have been waiting for it for a quite a while. It is used, among other things, for protecting family estate and to support multi-generational succession. This text will discuss what a Polish family foundation will be allowed to do. It shows the practical application of the new tax regulations by comparing them with other European solutions.
The establishment of a Polish family foundation provides space for ordering family property matters, securing such assets against creditors’ claims, and for planning succession. What else do you need to examine the family foundation model?
What is a family foundation?
The family foundation in Poland has goals similar to the solutions known in Europe. Its structure is very similar. According to the Polish legislator, the main task of the family foundation will be to collect family assets, manage them, and provide benefits to beneficiaries.
The family foundation is supposed to be an entity providing entrepreneurs with tools that will allow them to transfer their assets to people of their choice in the future in a safe, planned, and organised manner. It is also intended to improve corporate succession.
Founder and beneficiaries
A family foundation can be established only by a natural person. It is not possible for a legal person to establish a family foundation. The person who establishes the foundation is its founder. There may be several founders who do not need to be related to each other by kinship or in any way.
The persons who can benefit from a family foundation are termed beneficiaries. Pursuant to the Family Foundation Act, natural persons or public benefit organisations may be beneficiaries.
The founder may also be a beneficiary of the foundation.
The beneficiary may but does not have to be related to the founder or founders of the foundation. A situation in which the beneficiary is related to at least one founder allows for at least a partial reduction of the tax payable on the benefits paid by the foundation. Let us move on to the details. What does it look like?
Family foundation – where to start?
In order to create a family foundation, a potential founder should have an estate worth at least PLN 100,000 at their disposal, which should be contributed to the foundation as a minimum founding capital. This capital must secure the foundation during its entire existence. This means that it cannot be depleted, and if it happens to be, the prospective profits of the foundation should be used to supplement it in the first order.
From the formal perspective, in order to establish a family foundation, the founder should draw and adopt articles of incorporation and establish the rules and regulations of the foundation. The rules and regulations is the place where the founder or founders indicate the beneficiaries of the foundation and determine the benefits to which they are or shall be entitled within a certain period. In addition, in order to establish a family foundation, the founder must enter it in the register of family foundations.
Therefore, the process of establishing a foundation by the founder is not complicated and does not differ greatly in this respect from setting up a limited liability company. Its structure is also simple, similar to that of a limited liability company. However, establishing a foundation, unlike founding a company, requires consideration of how to go about it. For example, it is impossible to use a rules and regulations “template”, as in the case of a limited liability company. That is why some international law firms in Poland will charge you PLN 70,000-200,000 for establishing a foundation. The amount may seem exaggerated and it cannot be excluded that it is so. However, one cannot underestimate the fact that a thorough preparation is necessary to establish a foundation. In other words, in order to set up a limited liability company, you should make an appointment with a notary – an hour or so, while a few weeks ought to be allocated to establishing a foundation, as well as gathering an experienced team with which you will work.
An inside look into the family foundation
The family foundation consists of three bodies. These are the management board, the assembly of beneficiaries and the supervisory board. The management board and the assembly of beneficiaries are the primary bodies necessary for the functioning of the foundation. The founder appoints the management board in the rules and regulations and from that moment it is the management board that conducts the foundation’s affairs. The assembly of beneficiaries is also a body appointed by the rules and regulations in which the founder appoints its members. The assembly of beneficiaries plays a role very similar to that of the assembly of shareholders in a limited liability company.
What economic and investment operations may be carried out by a family foundation?
A family foundation may conduct any economic operations, however, it obtains tax preferences only if it conducts them within strictly defined scopes defined in Art. 5 of the Family Foundation Act of 26 January 2023.
But let us examine this catalogue, are these all? Below, we present the content published ad nauseam in today’s media, together with a commentary on what is hidden behind these seemingly meaningless terms. So, what activities can a family foundation conduct on preferential terms? The following shall be exempt from tax:
- sale of property, unless such property was acquired solely for the purpose of further sale – e.g., paintings, collectors’ cars, gold, but also real property. Also replenishment of raw materials stock, of which we know that it will be in short supply on the market in a moment, etc.;
- renting, leasing or making property available for use on another basis, for example: apartment, commercial premises;
- joining trade companies, investment funds, cooperatives and entities of a similar nature, having their registered office in the country or abroad, as well as participation in these companies, funds, cooperatives and entities – this does not really require explanation;
- acquisition and sale of securities, derivatives and similar rights, i.e. shares on the stock exchange, bonds, options, and certificates. Practices will surely be formed in this field. I assume that the catalogue is quite broad and, as one might think, it is wider than the catalogue of exemptions for a Cyprus-based company;
- granting loans to capital companies in which the family foundation holds shares or stocks, partnerships in which the family foundation participates as a partner, and to beneficiaries – this is indeed an excellent solution, there is no interest exemption anywhere, neither in AIF nor in a holding company, even a Cypriot one; What a practical solution a loan to the beneficiary is! We have them, don’t we?
- trading in foreign legal tenders belonging to the family foundation in order to make payments related to the operations of the family foundation – could it be that forex is to be found here? I do not know of any regulations that would be so far-reaching in Europe, unless it is a company in Dubai or a foundation in Liechtenstein!
- production of plant and animal products processed in a non-industrial way, with the exception of processed plant and animal products obtained as part of special agricultural production divisions and products subject to excise duty, provided that the quantity of plant or animal products from proprietary cultivation, breeding or rearing used for the production of the product in question constitutes at least 50% of that product – sale of products, i.e. animals, vegetables, fruit, cereals, and processed products of that farm;
- and forest management – sale of timber, Christmas trees.
So, where is the tax tucked away? Taxation of a family foundation
A family foundation is taxed depending on whether it conducts business operations “only” in the preferred, above-mentioned scope or goes beyond such scope.
In the case of conducting business in the area mentioned above, the foundation is COMPLETELY exempt from the obligation to pay income tax. Tax obligation arises only when the benefits are paid to the beneficiaries.
In the case of paying benefits to the beneficiary a foundation, the foundation is obliged to pay corporate income tax in the amount of 15% (CIT), only on the income that is paid to the beneficiaries. It should be borne in mind here that as long as it does not pay benefits, no tax will be payable. In consequence, the family foundation operates on principles resembling the Estonian CIT. Thanks to this, it can become a self-propelled investment machine used to multiply family estate. Payments to beneficiaries will still not be taxed.
The benefits paid to the beneficiary will be taxed only in the case of payments to unrelated persons – then such tax is 15% PIT – it is a tax independent of the tax paid by the foundation itself. But if the beneficiary belongs to the zero tax group of the founder, i.e. his or her ascendants or descendants, they are exempt from paying PIT tax. So this applies to grandparents and grandmothers, fathers and mothers, sons and daughters, and grandchildren (as well as all those with the prefix “great-“).
The situation is different when the foundation’s operations go beyond the framework set out in the Polish Family Foundation Act. The foundation is then obliged to pay a CIT of 25% regardless of whether it pays benefits to its beneficiaries. In such a situation, however, it does not pay 15% CIT when paying benefits. Hold on, the purpose of the foundation is not to run a business. Companies where you can pay a 9% tax serve this purpose. The foundation is intended to protect assets and investing assets alongside an economic activity would contradict their protection.
The family foundation cannot be combined with the Estonian CIT. According to the Act, the family foundation, as well as its founders and beneficiaries, cannot be stockholders or shareholders of companies using the so-called Estonian CIT. Well, since the Foundation gives better benefits than the Estonian CIT, let us opt for the foundation. Especially since the payments of benefits from the foundation are always taxed on a flat-rate basis, which means that
- they do not increase the tax base,
- are not subject to inheritance or donations tax,
- neither are they subject to the solidarity fund tax.
Will this solution work?
The Family Foundation is a new institution in Polish law, but it has long been known in Western Europe. Owing to this, it is already possible to assess its usefulness and effectiveness as an instrument for achieving goals such as accumulation of family estate, preservation of the inheritance of family businesses or succession planning. In countries such as Austria and Liechtenstein, such solutions have been in place for over 100 years. For a long time, we have also known the concept of the Trust, which in Anglo-Saxon law pursues the objectives of protecting assets and distributing them to beneficiaries. The private foundation is precisely the younger sister of the trust!
Of course, the use of the family foundation should be planned in an appropriate way to ensure its stability and security. Is it possible to start establishing a foundation today – absolutely yes!
Let us summarise all this. What could we use a family foundation for?
Looking at the family foundation, we can see that it can be a very good and long-awaited institution for the protection and management of private estate, which has been operating in Europe for long decades. This is not a new invention, but a standard for today’s needs to maintain the economic development of each of the economies.
I will pay particular attention to three potential applications of the Foundation:
- as an investment vehicle offering far better benefits than a holding company,
- to protect assets from (future) creditors and
- for succession planning.
Please bear in mind that this is a new construct in Polish law, on account of which it deserves special attention in terms of functionality and effectiveness. However, it has proved its worth in Western European countries for decades.
It was not without reason that the draft law on the family foundation stipulated returning to it three years after its entry into force so as to analyse and possibly introduce amendments. This is a very mature approach on the part of the legislator.
Finally, I would like to add that of all the foundations which I have established on the basis of Polish or foreign law, the Polish Family Foundation promises to be an exemplary solution that will save both tax and legal costs – analogous foreign solutions are actually pretty costly.