Introduction to concept of family foundations in Poland
In 2023, the concept of family foundations was introduced to the Polish legal system. The aim of the regulations governing family foundations is to facilitate the accumulation of family wealth and thus allowing capital to be retained in Poland for numerous generations. The transfer of wealth to a family foundation is intended to protect it from distribution, to enable its multiplication, and, therefore, to derive benefits from it that can be used to cover the living expenses of the persons designated by the founder. In addition, the purpose of a family foundation is to meet the needs of its beneficiaries.
Implementation of the concept of family foundations into the Polish legal system addresses the specific needs of family businesses, which, according to publicly available data, account for 60% of all businesses in Poland. Prior to the introduction of these regulations, the legal opportunities for a smooth intergenerational succession process were limited.
May 2024 marked the first anniversary of family foundation legislation in Poland. The legislation on family foundations is the law that many Polish family businesses have been waiting for. To date, more than 1,000 family foundations have been registered in Poland.
Overview of legal aspects
From the legal perspective, family foundations are legal entities. A family foundation acquires legal personality upon registration in the Register of Family Foundations. The Register of Family Foundations is kept by the District Court in Piotrków Trybunalski, as the registering court. The Register of Family Foundations is public.
A family foundation can only be established by a natural person with full legal capacity who has declared the establishment of a family foundation in a foundation deed or in a will.
In the foundation deed of a family foundation, the following elements should be included:
- Definition of the purpose of the foundation: In the beginning, it is necessary to define what the main objectives of the foundation will be. These may be charitable, educational, scientific, cultural, or other lawful purposes.
- Choice of name: The deed must include a name that will represent the activities and nature of the foundation. The name should be unique and must not infringe on the rights of others.
- Determination of the registered office: The registered office must be indicated in the deed, which is important for registration and legal issues.
- Designation of the organs of the foundation: The organs that will govern the foundation must be specified in the foundation deed. Most often these are a board of directors and a foundation council. It is necessary to describe their tasks, method of appointment, and powers.
- Operating principles: It should be defined what the decision-making processes within the foundation will be, including how decisions will be made, the management of funds and representation.
- Foundation assets: The deed must contain information on the initial assets transferred to the foundation and the rules for their management and disposal. The sources of funding for the activities of the foundation may also be indicated in this respect.
- Rules for amending the constitution and dissolving the foundation: The foundation deed should specify the procedures to be followed to amend the foundation deed or to dissolve the foundation. It must also be indicated what will happen to the assets of the foundation upon dissolution.
Once the deed has been finalized, the document must be submitted to the relevant registration court in order to obtain the status of legal personality.
From a legal perspective it also important to ensure that the deed meets all legal requirements, including those relating to data protection and charitable legislation.
Once registered, the foundation can start operating in accordance with its foundation deed and objectives.
A family foundation may be established for a limited period of time, in which case the duration of the family foundation must be specified in the foundation deed. However, a family foundation may also be established for an indefinite period of time.
The foundation deed of a family foundation must be drawn up in the form of a notarial deed.
Taxation of family foundations – in a nutshell
Tax issues are key to the successful establishment of a structure involving a family foundation.
A family foundation may carry out business activities on the basis of assets received as part of the foundation fund (with a minimum market value of PLN 100,000.00) as well as fixed assets and property acquired in the course of the operation of the family foundation. However, the scope of permitted activities of a family foundation is limited. Pursuant to the Family Foundation Act, a family foundation may only carry out business activities in the following areas, among others:
1) Disposal of property, provided that the property is not acquired solely for the purpose of further disposal;
2) Leasing, renting or making property available for use on any other basis;
3) Accession to 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) Provision of loan financing to:
(a) incorporated companies in which the family foundation holds shares,
(b) partnerships in which the family foundation participates as a partner, and
(c) beneficiaries.
At the same time, it should be borne in mind that the restriction indicated above in point 1 on the inability to engage in business activity in the disposal of property does not apply to the rights arising from joining and participating in the entities indicated in point 3 above and the disposal of assets indicated in point 4 above.
From a tax perspective, a family foundation is exempt from income tax. However, this exemption does not apply to those business activities that go beyond the scope of the permitted activities. In the event that income is generated from activities other than those permitted, the family foundation is liable to pay income tax at a sanctioned CIT (Corporate Income Tax) rate of 25%. In addition, if the family foundation makes distributions to its beneficiaries, the family foundation is obliged to pay corporate income tax at a 15% CIT rate. Distributions made to the founder and his or her close family are not subject to Personal Income Tax (PIT).
When do Polish family businesses decide to establish a family foundation?
Based on our experience to date, and by observing the practice of the Polish market, it is possible to distinguish three categories of situations in which Polish family companies decide to establish family foundations:
- A family foundation being a holding company owning shares in Polish capital companies, mainly limited liability companies (in Polish spółka z ograniczoną odpowiedzialnością), but also joint-stock companies (in Polish spółka akcyjna), and simple joint-stock companies (in Polish prosta spółka akcyjna);
- A family foundation being an entity holding real estate investments;
- A family foundation as a substitute for a foreign family foundation.
Scenario #1 – A family foundation as a holding entity
Based on the Polish Corporate Income Tax law, limited liability companies are in general taxed at a 19% CIT rate on their worldwide income (small taxpayers can apply a preferential 9% rate provided that certain circumstances are met). Whereas the distribution of profits of limited liability companies to natural persons owning shares in limited liability companies is subject to PIT at a 19% rate. Thus, in general, the effective tax rate (ETR) of a typical structure involving limited liability companies is approximately 34.39%.
However, in the case of a family foundation that owns shares in a limited liability company, distribution of profits to the shareholder is not subject to any tax as obtaining dividends is a permitted activity per the Polish Family Foundation Act. Any distribution of profits from the family foundation to the family foundation founder and its close family members is subject to CIT at a 15% rate and is not subject to PIT. Thus, the ETR of a holding structure involving family foundations and limited liability companies is lower than in the case of a typical holding structure with natural persons being the direct owners of operating entities.
Another tax preference that is commonly used in the structures involving family foundations is tax exemption for income from interest due on the loan provided by a family foundation to the company in which the family foundation has shares. This is important because with financing being provided by natural persons who are shareholders, any distributed interest is subject to PIT at a 19% rate collected by the company paying out the interest.
Scenario #2 – A family foundation as a real estate investment vehicle
Investing in real estate properties (both residential and commercial) is popular among owners of family businesses in Poland.
If the real estate is owned directly by natural persons, as a rule any revenue derived from the rental of such properties are subject to a flat-rate tax of 8.5% up to the amount of PLN 100,000 per annum and at 12.5% towards the surplus of revenues over this threshold. Another option is to treat the rental income as income from sole proprietorship; in such a case besides flat-rate taxation it also possible to apply a flat rate tax (19% PIT on the income and 4.9% for a non-deductible health care contribution) and progressive taxation (12% PIT applied up to the amount of PLN 120,000 income derived in a given tax year and a 32% tax rate applied towards the excess of this amount; in any case a 9% healthcare contribution is applied). Should the business activity route be pursued, social security contributions are applied.
However, should a family foundation be the owner of real estate properties, rental income is exempt from income tax. Therefore, a family foundation is an effective way to reinvest rental income in a tax-free way.
Scenario #3 – A family foundation as a substitute for a foreign family foundation
In the past it was popular among owners of family businesses in Poland to relocate shares in Polish entities abroad to foreign-based investment vehicles, including family foundations established in foreign jurisdictions (e.g., Luxembourg or Lichtenstein).
At the same time, it should be borne in mind that based on Polish tax law, distributions of dividends by Polish tax resident companies to entities seated abroad may trigger withholding tax (WHT) at a 19% rate collected by the entity paying out the dividends, with a possibility of applying tax exemption for dividends based on the EU Parent – Subsidiary Directive.
In 2022, an important amendment to Polish tax law came into force which tightened the Polish WHT regime. Based on these regulations, the Polish tax authorities started to challenge the tax exemption for dividends stemming from the EU Parent – Subsidiary Directive due to the lack of business substance of the foreign-based recipients of dividends. This negative approach has also started to be applied towards foreign family foundations.
To remedy the above, some family business owners have started to consider transferring shares in Polish companies previously transferred to foreign family foundations to a Polish family foundation. Should this be the case, tax leakage related to the above-mentioned withholding tax in Poland that could occur in the case of transfer of dividends from the Polish companies to the foreign family foundation would no longer matter.
Last but not least, it should be noted that in line with the latest changes announced by the Polish Ministry of Finance, tax rules for family foundations are set to change to the disadvantage of taxpayers due to the observed cases of using family foundations for aggressive tax optimization. Thus far, no draft bill has been proposed in this respect.
To sum up, family foundations are a brand-new legal vehicle that is aimed at accumulation of family wealth and allowing capital to be retained in Poland for numerous generations. If they are used in the right way, the establishment of family foundations may also lead to lawful tax advantages. However, the forthcoming unfavourable changes in the taxation of family foundations should be observed.
Please do not hesitate to contact us if you have any questions:
Filip Biegun, PhD
Of Counsel, Tax Advisor
Email: biegun@peterkapartner.pl
