Basically a family foundation is a new ‘tool’ for facilitating succession in family businesses that will allow for the transfer of assets to the next generation in a tax-efficient manner while ensuring that the family’s values and legacy are preserved.
A new concept – family foundation – will soon be added to the Polish legal system
The Polish law provides a legal framework for creating family foundations. the essence of the law is to introduce the institution of the family foundation into the Polish legal system, facilitating the succession of Polish family businesses and enabling the accumulation and protection of family assets. These foundations will be subject to corporate income tax exemption, making them an attractive option for family businesses looking to pass down their wealth and values to the next generation.
By the definition, all family foundations are aimed at minimalisation of risk of unsuccessful succession and to ensure the continuation of businesses but also are deemed to:
♦ manage the assets of a family business and providing financial security for the group of people designated by the founder – usually the family. The family foundation enables the effective implementation of the process of succession in the family business.
♦ protect the assets from being distributed, to enable them to be multiplied and to derive benefits that can be used to cover the costs of living of persons designated by the founder.
Transfer of funds and assets to the family foundation in Poland will be tax-neutral
It will be tax neutral to equip the family foundation with property and earn income from activities permitted by the Family Foundation Act.
Business activity of family foundations
As a rule, the law prohibits the family foundation from engaging in business activities but it promotes only certain activities which is justified by the assumption of limiting the risks associated with such activities and the need to protect the assets contributed to the foundation.
Family foundations in Poland will be allowed to pursue business activity only in the following areas:
♦ sell assets (unless they have been acquired for resale only)
♦ lease or rent assets or provide them for use on another basis
♦ join commercial companies, investment funds, co-operatives and similar entities established in Poland or abroad and participate in such commercial companies, investment funds, co-operatives and similar entities
♦ acquire and sell securities, derivative instruments and rights of similar nature
♦ grant loans to:
◊ incorporated companies in which the family foundation holds shares
◊ partnerships in which the family foundation participates as a partner
◊ beneficiaries
♦ trade in foreign currencies belonging to the family foundation to make payments connected with the family foundation’s business activity
♦ produce plant and animal products processed in a manner other than industrially, except for processed plant and animal products made as part of pursued special agricultural production segments and products subject to excise duty, if the number of plant or animal products produced as part of own crop or animal production used for the production of a given product constitutes at least 50 percent of that product
♦ forestry
Income from business activity (within the above-mentioned scope) will be CIT exempt.
Family foundations will be subject to a tax exemption from corporate income tax (on income generated on the above mentioned activities). Therefore, it will be tax neutral to equip the family foundation with property and earn income from activities permitted by the Family Foundation Act.
Tax will not be payable until funds (or other benefits) are paid / provided to beneficiaries or the founder
However, the above exemption will not apply to income tax on benefits provided by the family foundation to beneficiaries or founders, or on property transferred in connection with the dissolution of the family foundation. In this respect, the family foundation will be taxed at a rate of 15% on the value of the benefit provided or made available by the family foundation directly or indirectly to the beneficiary or founder, or on the income corresponding to the value of the property transferred in connection with the dissolution of the family foundation.
Moreover, it is important to note that:
♦ foundations will be generally also exempt from CIT on capital gains (dividends).
♦ benefits obtained the closest family members will be PIT exempt. A preferential PIT rate of 10% or 15% (depending on the case) will apply to benefits granted to other persons.
♦ foundations will not be exempt from tax on income from buildings, which means that its buildings with the initial value exceeding in total mPLN 10 will be taxed at a monthly rate of 0.035%.
If the foundation’s activity goes beyond the above scope, it will be subject to a higher CIT of 25% on such activities.
Inheritance tax perspective also will change
The Family Foundation Act also amends the provisions of inheritance law concerning the compulsory share (i.e., the right of close relatives of the testator to demand payment of a specified amount from persons who have acquired rights to the inheritance). It provides for the possibility, among others, of waiving the compulsory share, spreading it over instalments, deferring the payment deadline, or reducing its amount. In addition, payments received from the family foundation by the entitled person will reduce the value of the compulsory share.
It is worth to mention that the family foundation may be liable for the obligations, including maintenance obligations, of the founder that arose before the establishment of the family foundation (joint liability), and for maintenance obligations arising even after the establishment of the family foundation if enforcement against the founder’s assets is ineffective (subsidiary liability). Financial security for persons whom the founder has maintenance obligations should be the first priority.
Questions?
We can help you analyse the benefits of implementing a family foundation in your succession plan. We can also provide support during the process of setting up a family foundation and assist with its ongoing operations. Contact us to learn more about this new tool for facilitating succession in family businesses.