FAMILY FOUNDATION – OBJECTIVES OF THE NEW REGULATIONS

On 22 May 2023, the provisions of the Family Foundation Act came into force, creating an organisational form unprecedented in the Polish legal system. The purpose of the family foundation is to enable effective multi-generational succession of family businesses and to prevent fragmentation of family business assets. It is also an institution that allows the protection and enhancement of family assets, as well as providing them with professional management.

KEY FEATURES OF A FAMILY FOUNDATION

One of the most important features of a family foundation is that it has a legal personality, as of the date of its registration in the register of the family foundations.

A family foundation is therefore a legal entity created for the purpose of accumulating property, managing it in the interests of beneficiaries and providing benefits to them. Consequently, a family foundation has full legal capacity and judicial and procedural capacity. It can thus carry out economic activities, although the freedom to do so is limited by the tax consequences that must be taken into account beyond the closed catalogue of economic activities indicated in the law. It can also acquire property, including real estate, both in Poland and abroad. It is to be noted that granting a family foundation a legal personality may be a mean to protect family assets from enforcement. For example, the foundation is not liable for the founder’s debts incurred after its establishment, while before its establishment it is jointly and severally liable only up to the value of the property contributed by the founder.

ESTABLISHMENT OF A FAMILY FOUNDATION

A family foundation can only be created by an individual with full legal capacity. It can be created either in a foundation deed or in a will by declaring therein the establishment of the foundation. In addition, the law provides for the following requirements:

• the establishment of the statutes in the form of a notarial deed;
• taking stock of property;
• the establishment of the family foundation bodies required by law or the statutes;
• contribution of a founding fund (with a value of at least PLN 100,000);
• entry in the register of family foundations.

BENEFICIARIES OF THE FAMILY FOUNDATION

The beneficiaries of a family foundation, i.e. the individuals entitled to receive certain benefits from it, can be both natural persons and non-governmental organizations carrying out public benefit activities. The beneficiary of a family foundation can be the founder himself or the founders. Most often the beneficiaries will be the family members of the founder.

WHO CAN BE A FOUNDER OF A FAMILY FOUNDATION?

According to the Family Foundation Act, only an individual with legal capacity can be a founder. It should be emphasised that a family foundation may be established by more than one founder (except for a family foundation established by a will).

The founder has numerous obligations related to the initial phase of the existence of the family foundation. This is because it is the founder who submits a declaration on the establishment of the family foundation, determines its statutes, contributes property to cover the founding capital in the amount of at least PLN 100,000.00 (the founding capital may be covered by cash contributions as well as real estate, shares, etc.) and draws up its inventory and represents the family foundation in organisation. The founder has also been granted powers to shape the organs of the family foundation, as she/he can appoint and dismiss the members of the family foundation’s management board and supervisory board. The assembly of beneficiaries is also an obligatory body of the family foundation.

TAXATION OF FAMILY FOUNDATIONS

The family foundation may be a preferential solution for some entrepreneurs to reduce the tax burden related to the management of the foundation’s assets. First of all, it should be pointed out that a family foundation is subjectively exempt from corporate income tax.

In terms of this exemption, it is noteworthy that the receipt of assets by a family foundation will not be taxed – both in the case of the contribution of assets to cover the founding fund and later, e.g. in the form of a donation by the founder, his/her ascendants or descendants.

However, the law provides for several exceptions to the rule that its income is exempt from the income tax.

For example, the exemption does not apply to the economic activities of a family foundation outside the scope indicated in the law. A 25% income tax rate (CIT) will be applied to the income that does not fall within the statutory catalogue of the preferrential economic activities.,.

Another exception is the provision of benefits to beneficiaries. This refers both to the benefits transferred to beneficiaries during the operation of the foundation, as well as in connection with its liquidation. In these cases, the value of the transferred benefits will be taxed at a 15% corporate income tax (CIT) rate. This solution is therefore similar to the so-called “Estonian CIT”.

In addition, in terms of corporate income tax, we also have the taxation of a family foundation with a tax on income from real property, certain transactions between related parties and a tax on hidden profits. A family foundation may also be subject to value added tax (VAT), tax on civil law transactions and real estate tax.

TAXATION OF BENEFICIARIES OF FAMILY FOUNDATIONS

As a rule, benefits received by beneficiaries are also taxable on their side. The exception is the benefits to beneficiaries withingthe so-called “zero” tax group within the meaning of the Inheritance and Donation Tax Act (i.e. spouse, descendant, ascendant, stepchild, sibling, stepfather and stepmother). Such beneficiaries will be subject to the personal income tax (PIT) exemption.

The provisions of the Inheritance and Donation Tax Act also determine the scope of taxation for persons who do not qualify to the “zero” tax group. Indeed, in the case of income of persons belonging to tax group I within the meaning of the Inheritance and Donation Tax Act, the 10% PIT rate will apply, and for the remaining persons – the 15% PIT rate. As a side note, it should be pointed out that the payment of benefits to beneficiaries will not be subject to the inheritance and donation tax.

SUMMARY

A family foundation can be an effective tool to protect assets from division/distribution and allow for its accumulation. However, it is to say that the decision to establish a family foundation should be preceded by a precise, accurate and professional analysis of both the legal and tax aspects and the facts.

Please do not hesitate to contact our lawyers if you have any questions regarding the issues presented above. If you require a consultation on your specific case, we are at your disposal. Contact us and make an appointment today.