In general terms, a family foundation is an entity which, under the terms of its statutes, accumulates but also multiplies family (and non-family) assets and enables the transfer of benefits to its beneficiaries.

Key from the point of view of the idea of generational planning, an area that confirms the attractiveness of the solution introduced is the taxation rules.

And it is the topic of taxation that we will address in this paper, as the overall solution applied to the family foundation has been attracting unflagging interest for several months.

INCOME TAX TREATMENT OF THE FAMILY FOUNDATION

A family foundation benefits from exemptions and preferential tax rates on income tax at several levels:

1. at the establishment of the family foundation – no taxation on the part of both the founder and the family foundation;
2. when circulating the funds of the family foundation – exemption from CIT;
3. when disbursing funds from the family foundation to its beneficiaries – preferential 15% CIT rate;
4. at the level of beneficiaries – exemption in the so-called ‘zero’ tax group.

Re. 1. Establishment of a family foundation and contribution of assets

The establishment of a family foundation and the contribution of assets by the founder from the endowment of its initial fund is not taxed on the part of the :

• the founder – because the contribution of assets to the family foundation does not result in income on the part of the founder, which has been confirmed in numerous tax interpretations issued by the Director of the National Tax Interpretation(inter alia, letter of 4 September 2023. Director of the KIS, 0112-KDWL.4011.56.2023.1.WS; letter of 3 August 2023. KIS Director 0115-KDIT1.4011.439.2023.2.MR; letter dated 19 June 2023. KIS Director 0112-KDIL2-1.4011.347.2023.2.JK; letter dated 15 June 2023. Director of KIS 0113-KDIPT2-3.4011.284.2023.3.JŚ);
• family foundation – as it is covered by the tax exemption pursuant to Article 6(1)(25) of the Corporate Income Tax (“CIT“) Act (although the Act provides for certain exceptions in this respect).

Re 2. Turnover of funds of a family foundation – CIT exemption

A family foundation may carry out business activities, but the preferential tax rules apply to the so-called permitted business activities, which include:

1. the disposal of property, insofar as the property is not acquired solely for the purpose of further disposal;
2. hiring, leasing or otherwise making available property for use;
3. membership and participation in commercial companies, investment funds, cooperatives and entities of a similar nature, established either domestically or abroad;
4. acquisition and disposal of securities, derivatives and rights of a similar nature;
5. the granting of loans
   1. : to incorporated companies in which
   2. the family
   3. foundation holds shares,
   4. to partnerships in which the family foundation participates as a partner, to
   5. beneficiaries;

1. trading in foreign means of payment belonging to the family foundation for the purpose of making payments related to the activities of the family foundation;
2. the production of plant and animal products processed in a manner other than industrially, with the exception of processed plant and animal products obtained within the framework of the conducted special departments of agricultural production and products subject to excise tax, provided that the amount of plant or animal products originating from own cultivation, breeding or rearing, used in the production of a given product constitutes at least 50% of this product;
3. forest management.

The CIT exemption also covers the profit made by the family foundation and the profit generated from reinvestment. Indeed, the current wording of the legislation dictates that it is subject to the exemption as it falls within the permitted economic activities indicated by the Act.

ATTENTION: Conducting activities that fall outside the above catalogue entails the obligation to pay a sanctioning CIT rate of 25%. In practice, this means that activity beyond that defined by the law is unprofitable.

Re. 3. Payment of funds from the family foundation to beneficiaries – preferential 15 per cent CIT rate

The family foundation’s obligation to pay CIT will only arise when:

• the payment of benefits to the beneficiaries of the family foundation;
• the transfer of property in connection with its liquidation and concerns the value of the benefits transferred, i.e. paid out

– and in both of these cases the tax rate is 15%.

It should be noted that the CIT on the payment of benefits to the beneficiary is 15%, so the rate is lower than the tax rate charged on dividends from a limited liability company paid to an individual, which is 19%.

Table No. 1 (concerning the amount of income tax charged to the partners (an individual and a family foundation) of a limited liability company in order to present the differences in amounts resulting from different taxation)

NOTE: The CIT structure of a family foundation can be compared to the so-called Estonian CIT, as both the family foundation and the company covered by this form of taxation do not pay income tax until the benefit/dividend is paid to the beneficiaries/shareholders.

Re 4. PIT liability on the part of the beneficiaries

The beneficiaries of the family foundation are obliged to pay personal income tax after receiving the benefit, unless they belong to the so-called “zero” tax group, thus benefiting from PIT exemption.

In this case, the only tax that will arise between the family foundation and the family foundation beneficiary is the corporate income tax of 15 per cent in connection with the payment of the benefit to the family foundation beneficiary.

Table No. 2 (concerning the amount of taxation of the benefit paid by the family foundation to the beneficiary depending on the tax group to which the beneficiary belongs)

• VAT TREATMENT OF A FAMILY FOUNDATION

A family foundation, as a business legal entity, may be subject to VAT. Neither the VAT Act nor the Family Foundation Act prohibit such registration.

In order to determine whether a family foundation in a specific factual situation meets the definition of a taxpayer or performs economic activity on its own, an individual analysis must be carried out, taking into account the premises indicated, inter alia, in Article 15(1) and (2) and Article 5(1) of the VAT Act.

The explanatory memorandum to the draft law on foundations indicates, inter alia, that‘The VAT consequences of transactions and events carried out in connection with the introduction of a family foundation into the legal system will be determined in specific factual situations on the basis of the existing national VAT legislation, taking into account regulations arising from the VAT Directive and other EU legislation. The Act does not introduce changes in this respect“.

Thus, within the scope of its business activity, a family foundation may be recognised as a taxpayer of goods and services tax.

The above is confirmed, inter alia, by an interpretation issued by the Director of National Fiscal Information dated 11.10.2023 according to which: “in a situation where activities are performed that fall within the definition of supply of goods or provision of services – within the meaning of Article 5 of the VAT Act – including the disposal or making available of property, if the Foundation performs these activities continuously for profit, regardless of the purpose or result of these activities, it will be deemed to be a taxpayer conducting business activity within the meaning of Article 15(1) and (2) of the VAT Act.“.

SUCCESSION PLANNING ISSUES

The main purpose of a family foundation is to accumulate and manage property in the interests of beneficiaries and to meet the benefits of those beneficiaries.

This structure of the family foundation is intended to ensure that the assets are inherited by future generations in the manner planned by the founder, while at the same time enabling the family assets to be protected already during the founder’s lifetime.

However, it must be borne in mind that assets contributed to a family foundation cannot, as a rule, be returned during its lifetime. The only possibility exists in the case of the transfer (return) of the foundation’s assets in connection with its dissolution, however, this is a definitive solution leading to the termination of the legal existence of the family foundation. It is therefore important, at the planning stage of the family foundation, to carefully consider which assets to transfer to the family foundation and which to leave in the personal estate in order to preserve the possibility of free disposal (e.g. in a will).

In order for a family foundation to function smoothly both during the founder’s lifetime and after his or her death, the mechanisms under which it will operate must be carefully designed. To this end, the needs of the founder must be carefully analysed and then addressed in the body of the family foundation’s constitution.

Equally important is the development of an efficient mechanism for the payment of benefits to the beneficiaries of the family foundation. In a few decades’ time, this may be a sizable group of beneficiaries of a family foundation.

LIQUIDATION OF A FAMILY FOUNDATION – TAXATION OF THE ASSETS REMAINING AFTER THE LIQUIDATION OF THE FOUNDATION

A family foundation may be dissolved, inter alia, when:

• the circumstances indicated in the statutes have occurred, in particular the period for which the family foundation was established has expired;
• the purpose of the family foundation has been fulfilled;
• the purpose of the family foundation cannot be further pursued or the pursuit of the purpose is excessively difficult and the obstacles cannot be removed without incurring disproportionately high costs, in which case a resolution to dissolve the foundation is taken by the board of the foundation or a decision is taken by the registration court at the request of the beneficiary or ex officio after a hearing;
• it is managed in a manner obviously contrary to its purpose or the interests of its beneficiaries.

The dissolution of a family foundation requires a winding-up procedure, during which the family foundation’s current interests, the collection of debts and the fulfilment of obligations should be completed. The family foundation, on the other hand, may only take on new business if this is needed to complete ongoing affairs. As a rule, the liquidation is carried out by a member of its board of directors.

Once the liquidation has been carried out, the necessary documentation has been approved, the assets remaining after liquidation have been distributed and an application for deletion has been filed, the family foundation is deleted from the register of family foundations, resulting in its dissolution.

The liquidation procedure, assuming a simple structure of the family foundation and a regularised legal situation, takes approximately one year.

The taxation of the assets remaining after the liquidation of the family foundation takes place analogously to the payment of benefits to beneficiaries, viz:

• at the level of the family foundation it is 15% CIT, with the tax base being the value of the property of the dissolved family foundation less the tax value of the property contributed to it;
• at the level of the person entitled to receive the property – analogous to the payments from the family foundation to the beneficiary, and therefore persons remaining in the so-called ‘zero’ tax group will be exempt from PIT.

A family foundation is a comprehensive mechanism allowing for succession in family businesses.

Prior to the introduction of this solution into the Polish legal system, in practice, ‘ordinary’ foundations were often established on the basis of the Law on Foundations and called ‘family’ foundations. However, such a solution did not meet the needs of practice. The family foundation is therefore an attractive planning instrument and, at the same time, a response to a real market need, which is why it has attracted unflagging interest since its inception.

If you would like to find out more about the establishment and operation of family foundations, we encourage you to read the “Guide to Family Foundations” prepared by our Firm’s Partner, attorney-at-law Wojciech Bokina.

Authors:
	advocate Katarzyna Gelo
	Emilia Skibowska – legal assistant