In the legal state applicable before 2023 transferring a family business was difficult. Often, the owners decided to do it in the form of donation or inheritance. Although this allows you to hand over the reins to the chosen successor, it does not secure the succession of the company in the future. A Polish family foundation, which has been awaited for years, will certainly be a beneficial solution in this situation. The regulations governing its functioning enter into force on the 22nd of May 2023. In this article, you will find the most important information related to the activity of a family foundation in Poland.
Family foundation – main benefits
- PROTECTION OF ASSETSThe Polish family foundation has assets that are separate from those of the founder. Its liability for the founder’s obligations is very limited. Therefore it can be a great element of the private property protection structure.
- DEFERRED TAXTo some extent, the structure of a family foundation taxation is similar to the Estonian CIT form. The foundation must pay CIT only at the moment of making a payment to beneficiary or handing over its property.
- NO HEALTH INSURANCE CONTRIBUTIONRevenues of beneficiaries resulting from the PFF payments qualify as revenues from other sources. They are not related to work. Therefore, they are not subject to social and health insurance contributions. The entire tax on revenue from Polish family foundation amounts to 15%.
Why is it worth considering establishing a Polish family foundation?
Family foundation is a form of succession previously unknown in Polish law. It turns out that it represents also a form of tax optimization. The assumptions of the Act provide for no PIT taxation of payments made to its beneficiaries. The provisions provide also for deferred CIT on the “allowed revenue” of the foundation. This refers mainly to dividends and other capital gains.
Proper preparation of the corporate structure will allow to reduce the tax rates from over 26% for small taxpayers (CIT + PIT), to 9% CIT in a limited liability company (small taxpayer) and 15% CIT rate in a Polish family foundation (where tax is payable at the time of payment to the beneficiary).
The purpose of the Polish family foundation
The main objective of the Polish family foundation is to protect the family property of the enterprise and manage it in accordance with the will specified by the founder in the statute. The Foundation will be able to manage and trade its property. The beneficiaries indicated by the founder will participate in the foundation’s profits. The aim of Polish family foundation is to reduce the risk of unsuccessful succession. Another main goal is to ensure the continuation of family businesses.
According to the founder’s will, the Polish family foundation will support indicated natural persons. For example, it will be able to cover the costs of their education. The beneficiaries will be members of the founder’s family, but also people who are not related to him. Furthermore, the foundation will be able to provide services to public benefit organizations. The founder himself determines the method of allocation of the assets. If he indicates how the foundation is to dispose of the funds, it will ensure the exact execution of his will.
Will the Polish family foundation become part of the testator’s estate?
Since the foundation will be a separate legal entity, its assets will not be part of the testator’s estate, i.e. the founder. Forming a foundation will prevent the fragmentation of assets of the family business. Moreover, it will significantly facilitate its succession. The Polish family foundation is to prevent the need to introduce changes in the organizational structure of the company in the succession process.
Establishing the Polish family foundation
The process of establishing Polish family foundation can follow two paths:
- Submitting a declaration of will on the establishment of the Polish Family Foundation. The founder must submit it before a notary public. The foundation deed will be in the notarial form. In this way, a founder or a group of founders can establish a family foundation.
- By virtue of a valid will. Thefounder may include in his will a statement on the establishment of the foundation. Due to the specificity of the will, foundations formed in this way will have only one founder.
Upon submission of a declaration on establishing a foundation or upon opening a will, a Polish family foundation in organisation will start to exist. A family foundation in organization will be able to manage its assets on its own until obtaining an entry in the register. In particular, it will be able to acquire rights, incur liabilities, sue and be sued.
The Polish family foundation will acquire legal personality upon entry into the register. The District Court in Piotrków Trybunalski will keep an open register of Polish family foundations.
Polish family foundation – its statute and bodies
The foundation’s statute will have the form of a notarial deed. It will determine:
- objectives of the family foundation,
- its founding capital,
- assets at the time of creation,
- principles of operation of the foundation’s bodies
- the scope of rights of the foundation’s beneficiaries.
The statute may also specify guidelines for investing the assets of a family foundation.
The bodies of the family foundation will be:
- management board
- the meeting of the beneficiaries, and
- the council of protectors.
The appointment of a council of protectors is optional. However, it is obligatory if the number of beneficiaries of the foundation exceeds twenty-five people.
The seat of the foundation may be located only on the territory of the Republic of Poland. One can establish a family foundation for a definite or indefinite period.
Assets of the Polish family foundation
An important issue is that the founder will have to contribute the founding capital to the Polish family foundation. Its minimum value is 100 000 PLN. It includes property that the founder intends to allocate to pursue the foundation’s goals. It can include money, securities, as well as other rights.
There is a possibility to make donations to the foundation. There are no restrictions on who will be able to make a donation. Thanks to this, various entities can support the foundation’s capital. This will contribute to achieving the goals set by the founder.
Protection of the founder’s assets in the family foundation
Thanks to limiting the liability of a family foundation for the founder’s obligations, it can be an interesting tool for the protection of assets. A family foundation is liable for the founder’s obligations only up to the value of the property contributed to it by the founder. The condition for accepting the liability of the foundation for the founder’s obligations is their existence before the formation of the entity. The only exception is maintenance payments. The moment of their creation is irrelevant to the possibility of pursuing enforcement against the foundation’s assets.
The scope of operations of the family foundation
It is worth knowing that a family foundation will be able to conduct business activity to a limited extent. For example, the foundation will be able to:
- provide rental and lease services,
- join commercial companies, investment funds and participate in their activities,
- buy and sell stocks and bonds,
- collect interest on bank deposits,
- benefit from copyrights, licenses, patents.
Polish family foundation – how will it be taxed?
The family foundation will be a corporate income taxpayer. When the foundation transfers benefits to the beneficiary, it will have to pay CIT. Its amount is 15% of the tax base.
As a rule, benefits obtained by beneficiaries of foundations will be subject to personal income tax. The exception is the acquisition of benefits by the founder and his immediate family. The founder and relatives will be exempt from PIT on account of benefits received or property left at their disposal after the dissolution of the family foundation. The group of relatives benefiting from the exemption is extensive. It includes:
- sons-in-law and daughters-in-law,
- stepfather, stepmother,
- in-laws of the founder.
It is worth knowing that a family foundation can fulfil the maintenance obligation that rests on the founder. In this situation, the person entitled to maintenance will also benefit from the exemption from personal income tax.
Beneficiaries from outside the family must take into account obligation to pay PIT. In case of the Polish family foundation, it amounts to 15% of the tax base.
It is worth knowing that beneficiaries of the foundation are exempt from the tax on inheritance and gifts. However, the foundation can transfer funds to third parties who are not beneficiaries indicated by the founder. In this situation, the third party will have to pay inheritance and gift tax. Yet, it will not be subject to the obligation to pay PIT.
The family foundation will also benefit from tax exemption on income from capital gains. This will also cover dividends and interest received from companies in which it holds shares.
Estonian CIT and the Polish family foundation
The main difference between the Estonian CIT and the family foundation is the legal nature of each solution. A family foundation is a new type of legal entity. It has its own bodies, method of setting-up, and liquidation rules. Estonian CIT is a form of taxation of certain companies. It represents the so-called lump sum on capital companies. Is it possible to compare the two solutions? Let’s try:
|Estonian CIT||Family Foundation|
|Form of functioning||Applies to capital companies, limited partnerships and limited joint-stock partnerships (Polish: SKA)||New legal entity|
|Prerequisites||simple structure, employment||The founder must be a natural person|
|Limitations||Passive income above a certain level is prohibited||Cannot conduct business activity|
|Preferred business model||Operating income is allowed – services, trade||income from renting property; shares in Polish or foreign companies, funds and other entities; trading in securities, or granting loans to capital companies or partnerships in which the family foundation is a partner or beneficiary|
|Terms of CIT payment||no CIT until making a payment||no CIT until making a payment|
|CIT rate||20 or 25% rate of effective PIT and CIT in the event of paying dividends to shareholders||15% CIT rate and PIT exemption for payments to the assets of the founder and beneficiaries from the “zero group”. Additional 15% PIT rate when paying out to other people’s property.|
The above leads to a simple conclusion that a family foundation is the best choice for holding activities or, for example, renting property. This means the type of activity that is prohibited for companies in Estonian CIT. What is important – a family foundation conducting operating activities will pay a higher CIT rate – of 25%. It is worth remembering that one cannot combine the Estonian CIT with a Polish family foundation. One of the requirements of Estonian CIT is a simple ownership structure. This means that only physical persons can be a shareholder of a company under Estonian CIT.
Polish family foundation and inheritance law
It is worth recalling that a legitime is a cash benefit granted to family members who have been omitted by testator in his will. The right to legitime applies to those who would inherit from the deceased based on the provisions of the Civil Code.
The sum of legitime due results from the value of the estate. When calculating the legitime, the property that constitutes the founding capital of the family foundation will not be part of the inheritance. Yet, there is one condition. This property has to be contributed to the foundation more than ten years ago, counting back from the death of the founder.
Summary of tax benefits of the Polish family foundation
The Polish family foundation is subject to taxation on rules similar to those related to Estonian CIT. The obligation to pay CIT will occur only if the funds are paid to beneficiaries. Therefore, the CIT rate will always be 15% and will be due on funds paid. Beneficiaries will be able to use the full PIT exemption. Alternatively, they will pay PIT at the rate of 15%. See the details presented below:
- 15% CIT / 0% PITWhen making payments to the estate of the founder and beneficiaries from the “zero group” in relation to the founder, i.e. spouse, descendant, ascendant, stepson, siblings, stepfather and stepmother
- 15% CIT / 15% PITIn the case of payment to the estate of persons other than the founder and beneficiaries from the “zero group”
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