A family foundation is a relatively new solution under Polish law. It is becoming increasingly popular among entrepreneurs, owners of family businesses and individuals who have accumulated substantial private assets.
In simple terms, a family foundation helps organise family wealth, protect it for the future and plan succession, meaning the transfer of assets to the next generations.
It can also be a beneficial tax tool, but only if it is properly planned and operated in accordance with the law.
In this article, we explain:
- what a family foundation is,
- who may establish one,
- what assets can be contributed to it,
- how a family foundation is taxed,
- when this solution may be worth considering,
- and when it may not be the best option.
What is a family foundation?
A family foundation is a legal person established to accumulate assets, manage them and provide benefits to designated persons, known as beneficiaries.
It is important to distinguish a family foundation from an ordinary foundation.
A traditional foundation usually operates for social, charitable, educational or cultural purposes. A family foundation has a different role. Its main purpose is to protect private wealth and act in the interests of specific persons, most often members of the founder’s family.
A family foundation may be used to:
- protect family assets against fragmentation,
- plan succession in a family business,
- avoid conflicts between heirs,
- provide beneficiaries with funds for maintenance, education or other needs,
- reinvest profits and grow family wealth over time.
This solution may be particularly useful for entrepreneurs who have spent many years building a business or accumulating assets and want to ensure that their wealth is not accidentally dispersed or taken over by people who do not share a common vision for managing it.
Who may establish a family foundation?
A family foundation may be established only by a natural person with full legal capacity. This person is referred to as the founder.
The founder may establish a family foundation:
- in a deed of establishment,
- or in a will.
In both cases, a notarial deed is required.
A family foundation may have one or several founders. However, if the foundation is established in a will, there may be only one founder.
What is the minimum contribution?
The minimum founding fund of a family foundation is PLN 100,000.
This does not mean that the founder must contribute only cash. The founding fund may consist of different types of assets, such as real estate, shares in companies, stock, securities or other property rights.
In practice, the following assets are often contributed to a family foundation:
- shares or stock in family companies,
- real estate,
- cash,
- securities,
- investment fund units,
- other valuable assets or property rights.
Contributing assets to a family foundation requires careful preparation. The value of the assets should be determined, the relevant documents should be prepared and the tax consequences should be analysed, including from a VAT perspective.
How does a family foundation operate?
A family foundation operates through its governing bodies.
The most important bodies are:
Management Board
The Management Board conducts the affairs of the foundation and represents it externally.
It is responsible, among other things, for:
- managing the foundation’s assets,
- implementing the foundation’s objectives,
- keeping accounting records,
- ensuring the foundation’s financial liquidity.
Supervisory Board
The Supervisory Board supervises the Management Board.
It is not always mandatory. As a rule, it must be appointed if the number of beneficiaries exceeds 25. However, the founder may decide to appoint a Supervisory Board even in a smaller foundation if they want to introduce an additional control mechanism.
Beneficiaries’ Assembly
The Beneficiaries’ Assembly consists of the persons indicated in the foundation’s statute.
This body makes the key decisions provided for in the law and in the statute, for example approving financial statements.
Who may be a beneficiary?
The beneficiaries of a family foundation may be:
- the founder,
- natural persons, such as children, grandchildren, spouse, parents or siblings,
- public benefit organisations.
A beneficiary is a person who, under the foundation’s statute, may receive benefits from the foundation.
These benefits may take various forms. For example, the foundation may:
- pay specific amounts of money,
- cover education costs,
- cover medical treatment costs,
- cover maintenance costs,
- provide other benefits specified in the statute.
Importantly, the founder may make the payment of benefits conditional upon certain requirements being met.
For example, the statute may provide that a beneficiary will receive funds for university studies only after completing a certain stage of education or reaching a certain age.
As a result, a family foundation not only allows assets to be transferred, but also makes it possible to define clear rules for how those assets may be used.
Can a family foundation conduct business activity?
Yes, but only to a limited extent.
A family foundation was not created to conduct ordinary operating business, such as running a shop, restaurant, manufacturing company or service business.
Such activity should generally be conducted by operating companies.
A family foundation may instead perform an ownership and investment function. It may hold shares in companies, receive dividends, manage real estate and reinvest accumulated capital.
The permitted activities of a family foundation include, among others:
- disposing of property, provided that the property was not acquired solely for further resale,
- lease, tenancy and making property available for use,
- joining commercial companies and investment funds,
- acquiring and disposing of securities and derivative instruments,
- granting loans to specific entities, for example companies in which the foundation holds shares, as well as to beneficiaries,
- trading in foreign means of payment, but only in connection with the foundation’s activities.
This is a very important limitation.
If a family foundation begins to conduct activity outside the statutory catalogue, it may be subject to CIT at the punitive rate of 25%.
Family foundation and family business
In practice, a family foundation often acts as the owner of operating companies.
Example
Mr Jan has been running a manufacturing business for many years in the form of a limited liability company. He has children, but not all of them are interested in managing the business.
Mr Jan wants to protect the company against fragmentation of shares and inheritance disputes.
In such a situation, he may consider contributing the shares in the company to a family foundation.
The company itself continues to conduct manufacturing activity. The family foundation does not manufacture goods and does not serve customers. It owns the shares, receives dividends and manages the assets in the interests of the beneficiaries.
This model makes it possible to separate operating activity from family wealth.
The company runs the business, while the foundation performs an ownership, investment and succession function.
Taxation of a family foundation – the main advantage
One of the most important advantages of a family foundation is its preferential tax treatment.
As a rule, a family foundation benefits from a CIT exemption within the scope of its permitted activity.
This means that the foundation does not pay current income tax on many typical investment revenues, such as:
- dividends,
- sale of shares,
- lease of real estate to unrelated entities,
- sale of securities.
Tax generally arises only when the foundation pays benefits to beneficiaries or transfers property in connection with the liquidation of the foundation.
The tax rate payable by the foundation is then 15% of the tax base.
In simplified terms: as long as the assets remain in the foundation and are reinvested in accordance with the regulations, income tax generally does not arise. Tax appears only when benefits are paid out.
Does the beneficiary pay PIT?
This depends on the beneficiary’s relationship to the founder.
The founder’s closest family, known as the zero tax group, may benefit from a PIT exemption.
This group includes, among others:
- spouse,
- children,
- grandchildren,
- parents,
- grandparents,
- siblings.
If the benefit is received by a member of the founder’s closest family, in practice the primary tax burden is the 15% CIT paid by the foundation when the benefit is paid.
In the case of more distant relatives or unrelated persons, taxation may be less favourable. For this reason, the beneficiary structure should be carefully analysed before establishing a foundation.
Contributing assets to a family foundation
The mere contribution of assets to a family foundation generally does not give rise to income on the part of either the founder or the foundation.
This is one of the important advantages of this solution.
However, this does not mean that every contribution of assets is completely tax-neutral.
In practice, it is necessary to verify, among other things:
- what type of asset is being contributed,
- whether the founder acts as a private individual or as a VAT taxpayer,
- whether the right to deduct VAT applied when the asset was acquired,
- whether private assets, real estate, an enterprise, shares or securities are being contributed,
- what consequences may arise in the future, for example upon liquidation of the foundation.
The contribution of assets to a family foundation should therefore be preceded by a legal, tax and accounting analysis.
Sale of real estate by a family foundation – an important practical issue
One of the most frequently discussed topics is the sale of real estate by a family foundation.
The law allows a family foundation to dispose of property, but with one important reservation: the property may not have been acquired solely for further disposal.
This means that a family foundation should not operate like an entity trading in real estate, buying apartments or land only to resell them quickly at a profit.
Such activity may be regarded as unauthorised activity and taxed at 25% CIT.
The problem arises when the foundation purchases investment real estate, leases it for many years and then wants to sell it, for example because market conditions have changed or the foundation wants to move capital into other investments.
The key question is:
Does the mere awareness that real estate may one day be sold mean that it was acquired solely for further disposal?
A favourable position on this issue was taken by the Provincial Administrative Court in Rzeszów.
The court pointed out that the word “solely” is of key importance. If the foundation acquired real estate in order to lease it and earn rental income, and only in a later perspective allowed for its sale, it is difficult to say that the only purpose of the acquisition was resale.
This is an important signal for family foundations investing in real estate.
However, it does not mean complete freedom. Each case should be assessed individually, and the purpose of acquiring the real estate should be properly documented already at the purchase stage.
Lease of real estate by a family foundation
A family foundation may lease real estate. Lease is one of the permitted forms of activity.
If the foundation leases real estate to an unrelated entity, income from such lease may benefit from the CIT exemption, provided that the activity falls within the statutory scope.
The situation may be different where the foundation leases real estate to the founder, a beneficiary or a related company that uses the property in its business activity.
In such a case, special tax rules may apply and the foundation may be required to pay tax.
Example
A family foundation owns commercial premises and leases them to an operating company belonging to the same family.
The company conducts business activity in those premises. The rent may be a tax-deductible cost for the company, but CIT on lease income may arise at the level of the foundation.
This model may still make sense, especially from the perspective of asset protection.
The real estate is held by the foundation and not directly by the operating company, which bears business risks. However, the tax consequences must be properly planned.
Hidden profits - what should you watch out for?
The regulations also provide for taxation of so-called hidden profits.
These are situations in which the foundation does not formally pay a benefit to a beneficiary, but in practice an economic benefit is transferred to the founder, a beneficiary or related entities.
Hidden profits may include, among others:
- certain interest, commissions and fees on loans granted to the foundation by the founder, a beneficiary or a related entity,
- gratuitous or partially gratuitous benefits provided to beneficiaries or related entities,
- remuneration for certain advisory, legal, accounting, advertising or management services provided by related entities,
- loans granted to a beneficiary for at least 10 years,
- loans that should have been repaid in a given year but were not repaid on time.
Hidden profits are subject to 15% CIT.
Accounting and control obligations of a family foundation
A family foundation is not a “maintenance-free” solution.
It is a legal person that must comply with a number of formal obligations.
The most important obligations include:
- keeping full accounting books,
- preparing annual financial statements,
- filing tax returns,
- maintaining documentation concerning the foundation’s assets,
- updating the list of assets,
- fulfilling obligations towards beneficiaries,
- periodic audit of asset management.
An asset management audit should be carried out at least once every four years, and in some cases more often.
Its purpose is to verify whether the foundation properly manages its assets and fulfils its objectives.
For this reason, a family foundation is usually not a solution for very small estates. Its operation involves accounting, legal, tax and administrative costs.
When is it worth considering a family foundation?
A family foundation may be a good solution where several of the following circumstances apply:
- the business owner wants to plan succession,
- there is a risk of disputes over assets within the family,
- the family assets are significant and require professional management,
- the entrepreneur wants to protect shares in companies against fragmentation,
- the family wants to reinvest profits outside the operating company,
- the sale of a business and reinvestment of the proceeds is planned,
- the owner wants to separate private assets from business risks,
- the family owns investment real estate or an asset portfolio,
- the objective is to build long-term capital for future generations.
A family foundation works particularly well where the entrepreneur is not thinking only about the next tax year, but about a long-term perspective.
When may a family foundation not be the best solution?
A family foundation is not always necessary.
It may not be the optimal solution if:
- the assets are limited,
- the entrepreneur runs one business and reinvests all profits in its current operations,
- there is no need for succession planning or asset protection,
- the owner plans to regularly withdraw most profits for private purposes,
- the activity is operational in nature and does not fall within the permitted catalogue of foundation activities,
- the costs of maintaining the foundation would be too high in relation to the scale of the assets.
In many cases, a better solution may be, for example, a limited liability company, Estonian CIT, a classic holding structure or a properly prepared succession plan without a family foundation.
There is no single solution that is right for everyone.
A family foundation is a very useful tool, but only when it responds to the real needs of the owner and the family.
Family foundation and Estonian CIT
A family foundation is sometimes compared to Estonian CIT because, in both solutions, tax generally arises only when funds are distributed.
However, it should be remembered that a family foundation and Estonian CIT serve different functions.
Estonian CIT is a solution for operating companies that reinvest profits and do not distribute them to owners on an ongoing basis.
A family foundation, on the other hand, is a succession, ownership and investment tool.
Importantly, a company taxed under Estonian CIT cannot have a family foundation as its shareholder.
In practice, however, a mixed model may be considered. Part of the activity may remain outside the foundation and benefit from Estonian CIT, while part of the assets or other companies may be held by the family foundation.
Such structures require individual analysis.
Summary
A family foundation is a modern tool for people who want to protect assets, organise succession and manage wealth over a long-term horizon.
Its greatest advantages include:
- protection of family assets,
- the possibility of avoiding fragmentation of shares,
- greater control over who uses the assets and on what terms,
- preferential tax rules,
- the possibility of reinvesting profits without current CIT within the scope of permitted activity,
- flexibility in planning benefits for beneficiaries.
At the same time, a family foundation requires careful preparation.
The statute, beneficiary structure, method of contributing assets, rules for distributions, investment model and tax consequences should all be carefully considered.
It is not a solution for everyone, but for many family entrepreneurs it may become one of the most important elements of long-term wealth planning.
The article is for informational purposes only and does not constitute legal or tax advice. Each case should be analysed individually.