Table of Contents:
- Is a Family Foundation Profitable?
- Is It Worth Establishing Family Foundations by Spouses?
If the founders of a family foundation are spouses, the payment of benefits to them as beneficiaries is tax-free – confirmed by the National Tax Information in an interpretation dated June 25th this year, No. 0112-KDIL2-1.4011.114.2024.3.JK. Previously, we indicated that payments to spouses might be partially subject to PIT in such a situation.
Is a Family Foundation Profitable?
The tax motivation for establishing a family foundation (besides economic reasons and asset protection) is to limit the effective taxation of profit distribution to the foundation’s partners/beneficiaries. Benefits paid to beneficiaries are subject to a 15% CIT payable by the foundation, while the PIT rate is 0% for persons from the zero-degree kinship group to the founders, i.e., spouses, descendants, ascendants, stepchildren, siblings, stepfather, and stepmother (Article 21, paragraph 1, point 157 of the PIT Act).
Importantly, when determining the tax amount, not only the tax rate is important but also the value of contributions made by each founder. According to Article 21, paragraph 49 of the PIT Act, the settlement depends on the proportion of contributions of individual beneficiaries to the family foundation. Article 27 of the Family Foundation Act stipulates the obligation to prepare an inventory of assets. Article 28 states that for personal income tax purposes, the proportion of the value of assets contributed to the family foundation by each founder or by the family foundation is determined. The starting point for understanding the issue is the provision of the Family Foundation Act, which defines what should be understood as “assets contributed by the founder” and what as “assets contributed by the family foundation.” According to this regulation, “assets contributed by the founder” are assets contributed to the family foundation by donation or inheritance by the founder or their spouse, descendants, ascendants, or siblings. In contrast, “assets contributed by the family foundation” are assets contributed to it by other persons. The scope of the PIT exemption for benefits paid to a given founder is determined by the ratio between “assets contributed by the founder” (numerator of the fraction) and “assets contributed by all founders and the family foundation” (denominator of the fraction). If this proportion is 1, the entire benefit enjoys full PIT exemption (Article 21, paragraph 1, point 157 of the Act).
Is It Worth Establishing Family Foundations by Spouses?
In 2023, the Director of the National Tax Information issued unfavorable tax interpretations, according to which assets contributed to the family foundation by the spouse, descendants, ascendants, or siblings of a given founder can only be considered contributed by that founder if the spouse, descendants, ascendants, or siblings of that founder are not simultaneously other founders of the family foundation (individual interpretations of August 18, 2023, 0113-KDIPT2-3.4011.465.2023.1.JŚ, and October 5, 2023, 0114-KDIP3-1.4011.698.2023.3.MK1, June 10, 2024, 0114-KDIP3-2.4011.374.2024.1.JM).
Following the above-mentioned tax authorities’ interpretation, the contribution of assets to the foundation by both founders would result in no PIT exemption for the second spouse and their children. According to the logic of the National Tax Information, spouses could establish two separate family foundations, each contributing their own assets (company shares). In this case, the assets contributed by the founder would constitute 100% of the foundation’s assets, and both husband and wife would not pay PIT on funds received from the other spouse. Unfortunately, this means double accounting and maintenance costs for the family foundation.
However, it turns out that on June 25, a tax interpretation was issued by the National Tax Information confirming the full tax exemption for benefits paid from the family foundation to spouses who are also founders. The tax interpretation was issued following the acceptance of a complaint to the provincial administrative court regarding an earlier, unfavorable individual interpretation for taxpayers – April 30, 2024 (reference number 0112-KDIL2-1.4011.113.2024.2.JK). The Director of the National Tax Information confirmed that the founders (the Applicant and her husband) belong to the immediate family circle according to the Inheritance and Gift Tax Act, hence the payment of benefits to the Applicant will be fully exempt from personal income tax with the given proportion of assets.
