On May 22, 2023, the institution of a family foundation was introduced into the Polish legal system, the primary purpose of which is to accumulate family assets without the need to divide them in the event of the owner's death and to maintain the continuity of the family business.
A family foundation is established by the founder to meet the needs of the foundation's beneficiaries, who are generally members of his family, although the regulations do not prevent them from also being other persons.
I. Establishment of a family foundation and taxation of its activities
Establishing a family foundation requires registration and the obligations associated with it, most importantly:
- submitting a declaration of establishment of a family foundation before a notary,
- preparation of the foundation’s statute in the form of a notarial deed,
- coverage of the founding fund with a value of at least PLN 100,
- registering a family foundation,
- registering the foundation as a VAT payer in accordance with general rules.
While the above obligations are mainly formal in nature, the appropriate development of the statute is particularly important because this document must guarantee the mechanisms for the efficient and at the same time sustainable functioning of the foundation for many years. The content of the statute should therefore result in standards of conduct that answer the question of who is obliged or entitled to what in given circumstances. The Act indicates the minimum elements that the statute should regulate, including, among others, defining the circle of beneficiaries and the scope of their rights, but there is nothing stopping the statute from also referring to other issues.
From a tax perspective, a family foundation is an attractive legal institution for conducting passive-investment activities (specified in Article 5 of the Family Foundation Act), because within its scope the foundation is exempt from CIT. However, in the case of conducting business activities other than those permitted by law, the foundation's income will be taxed at an increased rate of 25%.
II. How to contribute funds or assets to a family foundation?
Payment of funds to a family foundation is tax neutral for CIT purposes. It is irrelevant whether the property was contributed to cover the founding fund or at a later stage by the founder or other persons, as a gift or as part of inheritance.
Since there are no exemptions for a family foundation in terms of VAT or PCC, taxation of the transfer of funds to the foundation is carried out on general principles based on the provisions of the relevant acts. The above means that each time the transfer of assets to a family foundation will have to be analyzed in terms of taxation of these transactions on the basis of VAT or PCC.
III. How to withdraw money from the foundation and what are the tax consequences associated with it?
Only its beneficiaries are entitled to receive benefits from the foundation's assets or property in connection with its dissolution (although the regulations do not prevent the founder from being a beneficiary at the same time).
Payment of benefits from a family foundation is subject to taxation on principles analogous to Estonian CIT, i.e. the moment of tax liability has been postponed until the payment of benefits to beneficiaries. The tax rate is 15%.
When the foundation's beneficiaries receive benefits, they are required to pay a flat-rate PIT of 15%, but there is a significant preference in this respect in relation to the payment of benefits to the founder and his closest family members (i.e. spouse, descendants, ancestors, stepchild, siblings, stepfather and stepmother) - then the payment of benefits benefits from tax exemption. Preferential taxation is also available to more distant relatives of the founder and persons related by marriage (i.e. son-in-law, daughter-in-law, parents-in-law, descendants of siblings, siblings of parents, descendants and spouses of stepchildren, spouses of siblings and siblings of spouses, spouses of siblings of spouses, spouses of other descendants), as these persons will pay a flat-rate PIT of 10%. In addition, it is worth emphasizing that the acquisition by individuals of benefits from a family foundation under the personal income tax is income from other sources and, due to this qualification, it does not constitute a basis for taxation with the solidarity levy in the amount of 4% of the surplus over PLN 1.
