Table of Contents:
- Will benefits received from the foundation be subject to the solidarity levy?
- Will the sale of family foundation assets be taxed?
- Will income from renting out family foundation assets be taxed?
- Dissolution of a family foundation in case of conducting unauthorized business activities.
On August 12, 2024, an announcement was published in the list of legislative works of the Prime Minister regarding a bill to amend the Personal Income Tax Act, the Corporate Income Tax Act, and certain other acts. According to the information provided, the aim of the proposed changes is to tighten the regulations concerning the taxation of family foundations. At this time, the bill has not yet been published. The following changes may or may not be included in the draft that will be submitted to the Sejm.
Will benefits received from the foundation be subject to the solidarity levy?
Currently, benefits received by family foundation beneficiaries are not subject to the solidarity levy (a 4% tax on income exceeding 1 million PLN). The change would result in family foundation benefits being combined with other taxpayer income for the purpose of calculating the solidarity levy. If the total income exceeds 1 million PLN, the excess will be taxed at a rate of 4%.
In the case of “large” benefits from family foundations (e.g., payouts exceeding 1 million PLN), the effective tax rate would increase from 15% to 19% for amounts exceeding 1 million PLN.
Will the sale of family foundation assets be taxed?
Another proposed change concerns the taxation of the sale of assets contributed by founders. Currently, family foundations can engage in the sale of shares, stocks, and other securities contributed by founders (as per Article 5(1)(1) of the Family Foundation Act), and such sales are not subject to taxation. The foundation may also dispose of assets (real estate, movables), provided that these were not acquired solely for the purpose of resale. The latter case applies, for example, to real estate contributed to the foundation solely for sale. Unlike the sale of shares/stocks, when selling real estate or movables, the Family Foundation Act requires examining the intent behind the contribution of the assets to the foundation. Depending on whether the assets were contributed solely for the purpose of sale, the transaction may be taxed at 25%, or it may not be taxed at all.
The proposed change is intended to address the practice of contributing assets to the family foundation and quickly selling them to benefit from tax preferences. According to the Ministry of Finance, the current regulations, which allow the sale of foundation assets as long as they were not contributed solely for the purpose of sale, are unclear.
The Ministry proposes introducing a tax rate of 19% on the sale of family foundation assets if the sale occurs before a specified period.
Only the sale of an asset by the family foundation after the proposed 15-year period from its acquisition would be tax-free.
Will income from renting out family foundation assets be taxed?
Currently, family foundations can engage in permitted business activities related to the rental and leasing of real estate, and the income from these activities is exempt from CIT. According to the Ministry’s announcement, income earned by family foundations from contracts for leasing real estate would become subject to taxation. This would be an exception to the general rule of no taxation of family foundations (which states that only benefits paid to beneficiaries are taxed).
Details of the proposal to tax family foundation income from this activity are not yet known. There may be a proposal to tax such income in the same way as income earned by individuals from similar activities (at rates of 8.5% and 12.5% of the taxable base).
Dissolution of a family foundation in case of conducting unauthorized business activities
Currently, family foundations can conduct business activities without restriction. However, if they engage in activities outside the scope specified in Article 5 of the Family Foundation Act, they are subject to a “penalty” CIT rate of 25%, losing the right to tax exemptions on the relevant income. There are no other consequences.
In the case of family foundations that conduct activities outside the scope allowed by the Family Foundation Act, legal proceedings for dissolution may be initiated ex officio. The entity conducting these proceedings will be the court.
