Table of Contents:
- What tax benefits does a family foundation provide?
- Can establishing a family foundation be subject to the anti-tax avoidance clause?
Many individuals consider establishing a family foundation due to the associated tax benefits. Questions arise whether under such circumstances the creation of a family foundation might potentially be subject to the anti-tax avoidance clause. In a recent protective ruling issued by the Head of the National Tax Administration, it was acknowledged that while the primary purpose of establishing a family foundation may indeed be for tax benefit purposes, this does not necessarily imply that the founders would meet other prerequisites for applying the anti-tax avoidance clause, as indicated in Article 119a of the Tax Ordinance.
What tax benefits does a family foundation provide?
Polish regulations governing family foundations offer founders significant flexibility in shaping the foundation’s operational rules, asset management, and distribution of benefits. Simultaneously, a family foundation can serve as a convenient instrument not only for accumulating and safeguarding family wealth but also for effectively increasing it. Corporate Income Tax (CIT) obligations arise only at a later stage, i.e., upon the distribution of benefits to foundation beneficiaries (at a rate of 15%), whereas generally, a company subject to standard tax rules would incur CIT upon profit generation. Consequently, aside from business succession, a family foundation represents an intriguing vehicle for activities such as real estate rental investments.
To the extent that a family foundation generates income from activities permitted by law, excluding specifically exempted revenues, it is exempt from Corporate Income Tax (CIT). It is important to note that in cases where foundation assets are used for the benefit of founders, foundation beneficiaries, or related parties, income derived from rent is subject to a 19% CIT rate, meaning such circumstances generally should not occur due to the loss of the right to exemption.
Can establishing a family foundation be subject to the anti-tax avoidance clause?
The subject of proceedings initiated by a joint application for a protective ruling was an analysis of whether the planned set of actions involving the establishment of a family foundation, the contribution of assets (including PLN 1 million in cash), shares or stocks of operating companies, conducting business activities by the foundation, and the provision of benefits to beneficiaries meets the criteria set forth in Article 119a § 1 of the Tax Ordinance.
As raised in the application, the main objective of the planned actions includes:
- establishing a family foundation to secure the future of family members and facilitate future succession of family assets, including shares and stocks in operating companies, by the descendants of the founders,
- endowing the family foundation with assets intended for conducting business activities by the family foundation,
- conducting business activities by the family foundation within the scope specified in Article 5 of the Family Foundation Act,
- accumulating assets by the family foundation and managing them in the interest of beneficiaries by enabling concentrated investment activities and reinvestment of assets by the family foundation within its business operations.
The Director of the National Tax Administration ruled out that establishing a family foundation would constitute an artificial transaction. It was concluded that since the founders intended from the outset to create a single entity consolidating the assets of their operating companies, establishing a family foundation for this purpose cannot be deemed artificial. Additionally, the Director of the National Tax Administration determined that the tax benefits derived from such actions would not conflict with the subject or purpose of the tax law or its provisions, as the legislator itself decided to exempt benefits provided to beneficiaries by a family foundation from inheritance and gift tax. For this purpose, Article 3 point 9 of the Inheritance and Gift Tax Act was introduced. Given the strictly family nature of the planned foundation, one cannot find application of the specified provisions of the Personal Income Tax Act inconsistent with the legislator’s intent.
