Liquidating a family foundation isn't just about "closing" it, but also about a specific procedure that must be properly conducted. This includes settling creditors, organizing assets, and submitting appropriate documents to the court. Taxation is also a factor – primarily the corporate income tax (CIT) for the foundation and the personal income tax (PIT) for the beneficiaries. In this article, we'll show you what to consider to ensure the liquidation of a family foundation is smooth and stress-free.
Liquidation procedure and obligations of liquidators
The commencement of the liquidation process for a family foundation marks the transition to a special procedure aimed at concluding the foundation's current affairs, repaying or securing its liabilities, and preparing the foundation for deletion from the register of family foundations. During this period, liquidators play a key role, and the law imposes on them a number of organizational, reporting, and financial obligations.
During the liquidation process, the family foundation retains legal personality, but it already operates under its current name with the addition of the designation "in liquidation"This follows from Article 92, paragraphs 2-3 of the Family Foundation Act. This means that the foundation may still exist in legal transactions, but its activities should be subordinated to the purpose of liquidation.
Opening of liquidation and reporting obligations
The first duty of the liquidators is to announce the opening of the liquidation in the Court and Commercial Gazette. The announcement should be made once and include a call for creditors to submit their claims within one month from the date of announcementThis obligation arises from Article 96 of the Family Foundation Act and is intended to enable creditors to submit their claims before the liquidation is completed.
Liquidators are also obliged to prepare opening balance of liquidation and submit it to the meeting of beneficiaries for approval. Importantly, the assets are included in the liquidation balance sheet according to their selling valueIf the liquidation takes longer, after the end of each financial year the liquidators should submit a report on their activities and a financial statement to the meeting of beneficiaries.
Liquidation proceedings and creditor protection
The basic liquidation activities include in particular:
- termination of the current affairs of the family foundation,
- collection of receivables due to the foundation,
- fulfillment of the foundation's obligations,
- securing or satisfying creditors,
- preparation of assets remaining after liquidation for release to entitled persons.
During liquidation, a family foundation should not undertake new matters unless necessary to conclude matters already underway. Special rules apply to real estate – as a rule, it is sold by public auction, while a private sale is only possible pursuant to a resolution of the meeting of beneficiaries and for a price no lower than the price established by the meeting.
A significant limitation is a ban on providing benefits to beneficiaries and a ban on distributing the assets of a family foundation before paying off all liabilities to persons other than the beneficiariesThis follows from Article 93, Section 2 of the Family Foundation Act. This means that the interests of creditors take precedence over payments to beneficiaries or the distribution of any assets remaining after the foundation.
Additionally, the release of assets remaining after satisfying or securing creditors cannot take place before the end of the year from the date of the announcement of the opening of liquidation and the summons to creditors to submit their claims. This rule, arising from Article 100 of the Family Foundation Act, applies to assets distributed to the founder, beneficiaries, or heirs of the founder entitled to the assets in connection with the dissolution of the family foundation.
If the foundation knows of any creditors who have not reported their claims during the liquidation process, or whose claims are not yet due or remain disputed, the liquidators should deposit the appropriate amounts into the court depositoryThis solution protects the interests of creditors while also enabling the continuation and completion of the liquidation procedure.
Completion of liquidation and deletion of the foundation from the register
After completing the liquidation activities, the liquidators prepare a financial report as of the day preceding the release of the assets remaining after the creditors have been satisfied or secured, i.e. the so-called liquidation reportAfter its approval by the meeting of beneficiaries, the liquidators publish the report at the family foundation's premises, submit it to the registry court and report it application to remove a family foundation from the register of family foundations.
CIT upon liquidation of a family foundation
The liquidation of a family foundation generally entails the obligation to pay corporate income tax. This applies primarily to situations in which the foundation transfers or makes available assets in connection with its dissolution.
Tax rate
Pursuant to Article 24q section 1 of the CIT Act, the tax on property transferred or made available in connection with the dissolution of a family foundation amounts to 15% of the tax base.
The same rate also applies to benefits paid by a family foundation and to benefits in the form of hidden profits. However, in the context of liquidation, the most important factor is the transfer of assets remaining after the liquidation process is completed.
What is the tax base?
The tax base is generally income corresponding to the value of the transferred property. This means that the starting point is the value of the assets transferred by the family foundation to eligible individuals upon its dissolution.
However, in the event of liquidation, the legislator has provided for a special reduction. The income corresponding to the value of property transferred in connection with the dissolution of a family foundation is reduced by the tax value of the property contributed by the founder or founders.
What is the tax value of property?
The tax value of property is not always the same as the amount for which the asset was contributed to the foundation. Pursuant to Article 24q, Section 4 of the Corporate Income Tax Act, this refers to value that has not previously been included in the costs of obtaining revenues and which could be accepted by the founder as a cost if he sold the asset immediately before contributing it to the family foundation.
At the same time, this value cannot exceed the market value of the property. In simple terms, this means that upon liquidation of a family foundation, taxation should primarily apply to the increase in the value of the property above its historical tax value.
Example
If the founder contributed an asset with a tax value to the family foundation 1 000 000 PLN, and in the event of liquidation of the foundation, these assets have the value 1 400 000 PLN, the CIT tax base will generally be the difference, i.e. 400 000 zł.
In this case, the tax will be 15 % this amount, i.e. 60 000 zł.
But be careful…
If the foundation's assets consist solely of cash, the tax authorities' unfavorable position should be noted. The Director of the National Tax Information (KIS) considers that the money contributed by the founder they do not constitute the "tax value of property" within the meaning of Article 24q sections 3 and 4 of the CIT Act. This approach was presented, among others, in individual tax rulings of 23 August 2023, file reference no. 0114-KDIP2-1.4010.149.2023.2.KS, and from June 3, 2024, reference number 0111-KDIB1-1.4010.183.2024.2.RH.
According to the authorities, cash cannot be sold for consideration in a way that allows the founder to recognize the cost of obtaining income. Consequently, their value does not reduce the tax base upon dissolution of the foundation, and 15% CIT should be charged on the entire value of assets transferred to entitled persons.
A different, more favorable approach is presented by administrative courts. The Regional Administrative Court in Poznań, in its judgment of 4 April 2024, file ref. I SA/Po 774/23, and the Regional Administrative Court in Warsaw in its judgment of 25 April 2024, file ref. III SA/Wa 2379/23 both judgments are not final – they decided that funds contributed by the founder should reduce the tax base.
Courts have indicated that the actual gain generated by the foundation should be subject to taxation, not the return of assets previously donated by the founder. Accepting the authorities' position would also lead to taxation of that portion of assets that does not constitute the foundation's profit. Consequently, the 15% CIT rate should generally cover only the surplus over the value of funds previously contributed by the founder.
Tax payment deadline
Pursuant to Article 24q, paragraph 6 of the Corporate Income Tax Act, the tax must be paid into the account of the tax office. by the 20th day of the month following the month in which the property was transferred or placed at disposal.
The deadline is therefore not counted from the date of completion of liquidation or from the date of deletion of the family foundation from the register. It is crucial to establish when the entitled person actually received the property or was given the opportunity to dispose of it.
For example, if the property is transferred in June, tax should be paid until July 20.
CIT-8FR declaration
The opening of liquidation during the tax year gives rise to more than one obligation to submit a CIT-8FR declarationIn accordance with Article 12, Section 2, Item 6 of the Accounting Act, the accounting books are closed on the day preceding the date of putting the foundation into liquidationand then – pursuant to Article 12, paragraph 1, point 5 of this Act – they are opened on the day the liquidation begins.
Consequently, in accordance with Article 8, Section 6 of the Corporate Income Tax Act, the foundation's current tax year ends on the date the books are closed, while the next one begins on the date they are reopened. The foundation should therefore submit a separate CIT-8FR declaration for the shortened tax year ending on the day preceding the opening of liquidation and another declaration for the tax year starting on the date of opening of the liquidationHowever, it does not last for the next full 12 months, but ends with the expiry of the tax year originally adopted by the foundation.
For example, if the foundation's tax year corresponds to the calendar year and liquidation is opened on July 1, the first shortened tax year will end 30 JuneThe next tax year will begin July 1 and ends on December 31 of the same year.
PIT when liquidating a family foundation
Income qualification, tax rates and exemptions
Pursuant to Article 20, Section 1g of the Personal Income Tax Act, the receipt of property in connection with the dissolution of a family foundation constitutes income from other sources.
If the income is not exempt, it is subject to flat-rate taxation under the principles set out in Article 30, Section 1, Item 17 of the Personal Income Tax Act. The tax rate is 10 % in the case of a person belonging to the founder Tax group I or II – in the part corresponding to the appropriate proportion of the property. In the remaining scope, the rate applies 15 %.
However, the Act provides for significant exemption for the founder and members of his immediate family belonging to the so-called zero groupPursuant to Article 21, Section 1, Item 157, Letter a of the Personal Income Tax Act, the income of the founder or a person specified in Article 4a, Section 1 of the Inheritance and Gift Tax Act, entitled to receive property in connection with the dissolution of a family foundation, is exempt from tax.
However, the exemption does not always cover the entire property received. Pursuant to Article 21, Section 49 of the Personal Income Tax Act, it applies only to the part of the income corresponding to the proportion specified in the list of property referred to in Article 27, paragraph 4 of the Act on Family Foundations, as at the date of obtaining the income.
Therefore, if the liquidation assets are received only by the founder and the assets assigned to him the proportion is 100% (i.e. he contributed all the assets to the foundation), all income earned by him should, in principle, benefit from the PIT exemption.
Obligations of the foundation as a payer
If the transferred property benefits from the PIT exemption, the foundation does not collect tax and does not pay it to the tax office. Therefore, it is not included in the PIT-8AR declaration..
The payer's obligations would arise only when the property was received a person not covered by the exemption.
Additional obligations (NIP-2, CRBR)
Updating data at the tax office
Upon opening of liquidation, the name of the family foundation is added with the designation "in liquidation", which results from Article 92, paragraph 2 of the Act on Family Foundations. The change of name should be reported to the appropriate head of the tax office at NIP-2 form.
Pursuant to Article 9, Section 1 of the Act on the principles of recording and identifying taxpayers and payers, the update notification should be submitted within 7 days from the date of change of data.
After the liquidation is completed and the foundation is removed from the register, it is necessary resubmitting the NIP-2 form. It should be indicated in it cessation of the legal existence of the foundation. Also applies in this case deadline 7 days.
Updating data in CRBR
The opening of liquidation also requires updating data in the Central Register of Beneficial OwnersPursuant to Article 59, point 1, letter a of the Act on Counteracting Money Laundering and Terrorist Financing, the name of the foundation, which, after the opening of liquidation, contains the designation "in liquidation," is subject to notification.
Pursuant to Article 60, paragraph 1a of this Act, the update should be made within 14 days from the date of change of dataPursuant to Article 60 paragraph 2, this deadline Saturdays and public holidays are not included.
After the family foundation is removed from the register no separate application for its deletion from the CRBR is submitted. The data remains stored in the Registry on the principles set out in Article 64 of the Act.
Summary
Liquidating a family foundation requires not only the appropriate procedure, but also proper tax settlement and compliance with formal requirements. In practice, particular attention must be paid to the taxation of transferred assets, deadlines for filing declarations, and updating the foundation's data. However, each case can be different, so it's worth analyzing each case individually. If you have any questions or concerns, please contact our law firm.
