After years of anticipation, the law on Polish family foundations has lived to see its passage by the Sejm and has come into force. Admittedly, the main purpose of the family foundation legislation is to create a convenient family business succession opportunity for Polish entrepreneurs, but due to favorable tax rules, family foundations will also be a means for investment and reinvestment of cash.
Polish family foundation and taxes
A family foundation is subject to specific requirements as to its business activities – the object of a family foundation’s activities can be all passive investments in companies, investment funds, securities and other financial instruments, but also property, including property acquired for lease. As an example, there is no obstacle to the funds raised from dividends being used to invest in commercial real estate for the purpose of leasing.
To the extent that the foundation earns income from business activities permitted by law, with the exception of income specifically excluded from exemption, a family foundation is exempt from corporate income tax (i.e. CIT). However, it is worth noting that in the case of the use of the foundation’s assets for the needs of the founder, the foundation’s beneficiary or a related person, the rental income is taxed at a 19% CIT rate, so such a situation should not occur in principle due to the loss of the right to exemption.
Taxation of the foundation’s income will occur only at the time the benefit is transferred to its beneficiary, when a family foundation is subject to CIT at a rate of 15%, and the tax base is the market value of the benefit transferred to the beneficiary.
As in the case of the so-called “Estonian CIT,” the legislator also introduced a regulation on the taxation of “benefits in the form of hidden profits,” which lead to the taxation of donations and benefits to beneficiaries made outside the statute – by way of example, it is the cost of servicing a loan given to the foundation by the beneficiary
PIT taxation of benefits received by beneficiaries
When a family foundation performs a benefit (e.g., through a cash payment) to its beneficiary, the tax consequences can vary, depending on which tax group (as defined in the Inheritance and Gift Tax Law) the beneficiary belongs to. Thus, if the beneficiary remains:
1. a member of the founder’s immediate family belonging to the so-called zero tax group (e.g., spouse, child, parent, sibling, grandparent, great-grandparent) – payment of funds to the beneficiary will result in a tax liability on the side of the family foundation (15% CIT), while no tax liability will arise on the side of the beneficiary;
2. a member of the founder’s extended family belonging to tax group I or II (e.g., uncle, nephew, spouse of siblings) – then, in addition to tax on the side of the family foundation (15% CIT), there will also be a PIT obligation on the side of the beneficiary (10% PIT);
3. a person who does not belong to the above categories – then in addition to the tax on the side of the family foundation (15% CIT), there will also arise a PIT tax obligation on the side of the beneficiary (15% PIT).
Thus, only if the beneficiary belongs to a zero tax group will it be possible to avoid double taxation.
Family foundation as an alternative form of doing business
The provisions on a Polish family foundation allow funders quite a lot of flexibility in shaping the foundation’s rules of operation, management of assets and payment of benefits. At the same time, a family foundation can be a convenient instrument for not only accumulating and securing family assets, but also effectively multiplying them. This is because CIT liabilities arise only at a later stage, i.e. the payment of benefits to the foundation’s beneficiaries (at a 15% rate), while, as a rule, a company subject to ordinary taxation rules is already obliged to settle CIT upon making a profit. Thanks to the above, in addition to business succession, a family foundation is an interesting vehicle for, for example, investment in rental property.