Taxation of a family foundation beneficiaries primarily considers their familial connection to the founder. When determining the tax rate, it is necessary to analyze the degree of kinship and affinity between the beneficiary and the founder. Who can be a beneficiary of a family foundation? What is the taxation of family foundation beneficiaries? We present answers to these questions below.
Table of Contents
- Family foundation – crucial information
- Taxation of a family foundation beneficiaries – Personal Income Tax
- Taxation of a family foundation beneficiaries – Corporate Income Tax
- Taxation of family foundation beneficiaries – Inheritance and Gift Tax
Family foundation – crucial information
A family foundation is a solution introduced into Polish law by the Act of 26 January 2023, on Family Foundations. Its regulations govern the organization and functioning of family foundations. It concerns also the rights and obligations of the founder and beneficiaries.
Among the assumptions of the family foundation, the following can be identified:
- Formal separation of family and business,
- The family foundation acting as a family treasury,
- Implementing the founder’s vision and upholding values applied by him in business.
Thus, a family foundation’s goal is to ensure the operation of a business across generations. However, it also secures the financial needs of beneficiaries.
The founder can only be a natural person who:
- Has full legal capacity,
- Has declared the establishment of the family foundation in the founding act or will.
On the other hand, beneficiaries of a family foundation can be:
- a natural person
- a non-governmental organization,
which, in accordance with the statutes, can receive benefits from the family foundation or property related to its dissolution.
Moreover, the founder can also be a beneficiary.
Taxation of a family foundation beneficiaries – Personal Income Tax
As a rule, benefits received by beneficiaries of a family foundation are subject to taxation under the personal income tax.
Yet, there is a possibility of PIT exemption for received benefits. It is available for a founder or beneficiaries from the so-called Zero Group. This rule results from the Inheritance and Gift Tax Act.
So, exempted individuals include the founder, as well as his/her:
Beneficiaries not belonging to this group must take into account the obligation to pay tax in the following amount:
- Individuals related to the founder in the I or II tax group according to the Inheritance and Gift Tax Act – 10%,
- Others than the above – 15%.
When the family foundation is dissolved, and the founder or the close family members receive assets from the foundation, it represents income from other sources. Such income is also exempt from personal income tax.
In cases where:
- The foundation has more than one founder,
- Entities other than the founder or members of his immediate family contributed assets to the foundation,
only part of the income corresponding to that beneficiary’s share is exempt from personal income tax.
Importantly, a family foundation can fulfil the maintenance obligation imposed on the founder. In this case, the person entitled to maintenance will also benefit from the PIT exemption.
Taxation of the beneficiaries of a family foundation with PIT will also not occur to the extent that they are entitled to receive benefits under the statute. To qualify beneficiaries for PIT exemption, the statute must specify provisions on:
- Residing in properties that are contributions to the family foundation,
- Funding their education costs by the foundation,
- Funding their medical expenses by the foundation.
In the absence of appropriate provisions in the statute, beneficiaries of the family foundation are not entitled to tax exemption.
Taxation of a family foundation beneficiaries – Corporate Income Tax
A family foundation is a legal person. Due to its legal personality, a family foundation is subject to corporate income tax. However, according to the regulations it can benefit from an entity-based CIT exemption.
A family foundation is established to:
- Accumulate assets
- Manage assets in the interest of beneficiaries,
- Provide benefits to beneficiaries.
A benefit is understood as assets transferred to the beneficiary, including:
- cash funds,
Despite the aforementioned entity-based CIT exemption, providing benefits is associated with the obligation to pay tax. So, when providing benefits to beneficiaries, a family foundation must pay CIT at the 15 % rate of the tax base.
Taxation of family foundation beneficiaries – Inheritance and Gift Tax
According to the regulations, inheritance and gift tax doesn’t apply to the ownership acquisition of goods or property rights:
- which are the subject of benefits as mentioned in the Family Foundation Act,
- consisting of assets received due to the dissolution of a family foundation or family foundation in organization.
Beneficiaries of the family foundation are therefore exempt from inheritance and gift tax.
However, the foundation can transfer funds to third parties who are not its beneficiaries. In the case of third parties, the exemption from inheritance and gift tax does not apply.
The family foundation has been functioning in the Polish legal order for a short time. It is to ensure the existence of the company for next generations and to secure finances of beneficiaries. Benefits for beneficiaries of the family foundation are generally subject to PIT taxation. However, numerous exemptions exist, including the ones for the spouse, children, and siblings of the founder, as well as for specific statutory benefits. Beneficiaries of the family foundation are exempt from CIT and inheritance and gift tax.
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