A new regulation in Poland explained: family foundations and their taxation
Justyna Bauta-Szostak and Bartosz Głowacki of MDDP report on the introduction of family foundations in Poland, and how they will be taxed.
On January 26 2023, the lower house of the Polish parliament, the Sejm, passed the Family Foundation Act, which will enter into force in May 2023. The purpose of a family foundation, which is a new structure for Poland, is to accumulate wealth and manage it in the interest of the beneficiaries. For this purpose, the foundation is allowed to carry on business, though it is limited to investment activity of a rather passive nature. Not every sort of business is allowed.
A family foundation can be a shareholder in companies and partnerships, both seated in Poland and abroad. It may not only buy shares but also incorporate companies and partnerships. It can benefit from all the rights of a shareholder/partner.
The ability to participate in various entities extends to the financial activity of the foundation. It may finance subsidiaries and the beneficiaries with interest-bearing loans. What is important and very welcome is that the foundation is allowed to invest in financial markets. It may buy and sell stocks and other securities, as well as other financial instruments. The foundation is allowed to rent or lease property. The foundation may even be involved in farming, in that it may own a farm and be involved in agricultural production.
However, the relatively wide range of permitted activities for a foundation does not include speculation. The law provides for a ban on activities consisting of disposing of property/assets acquired solely for this purpose, which means that a foundation cannot run a factory or a warehouse. This is primarily designed to prevent abuse.
The above should not be understood as a total ban on taking advantage of business opportunities (i.e., buy cheaply and sell expensively), but the context is crucial. For example, if on one day the foundation receives shares that have been owned for years by someone else, and sells those shares shortly after, this may raise doubts. However, if a family foundation buys artwork or precious metals or gems as an investment and there is an opportunity to sell those at a profit, such a situation should not be controversial.
The tax treatment of foundations
As a rule, a foundation is exempt from corporate income tax (CIT) unless it carries on business which is not allowed. In that case, the profit will be subject to 25% CIT. This rate is significantly higher than the basic income tax rates (9%/19%), which unequivocally confirms its punitive nature.
In the remaining permitted scope, a family foundation will pay income tax only in relation to distributions to the beneficiaries. So until the assets are managed and if there is no distribution, there is no tax. Distribution triggers 15% CIT on the market value of the distribution, which may be in cash or in kind. If the distribution is made to close family members or to the founder, there is no personal income tax (PIT). If the distribution is made outside this group, 10% or 15% PIT is imposed.
Regardless of this, the foundation will be subject to the 0.035% wealth tax levied on buildings with a total value exceeding PLN 10 million (approximately $2.4 million) if they are rented by the foundation.
A family foundation is an interesting solution for managing private assets. It does not seem to be a tax vehicle – the characteristics of a foundation should be considered less important – but a proper ownership structure allows the investment of family wealth without an additional tax burden.
That said, a family foundation could be effective if the whole structure and assets are well considered and the foundation itself is for bona fide family reasons.