Family Foundations

2023 / 02 / 10

The work on the Family Foundations Act has been finished. The Act was signed by the President and is currently awaiting publication in the Journal of Laws. Three months after publication, the first family foundations in Poland can be established.

As family foundations are a new solution in the Polish legal system, we present a summary of the major assumptions underlying their operation.

BASIC ASSUMPTIONS FOR THE OPERATION OF FAMILY FOUNDATIONS

The family foundation will be a legal person established primarily to accumulate assets, manage the assets in the interest of beneficiaries and provide benefits to beneficiaries.

Only a natural person can be a founder of the family foundation. The foundation may be established by more than one founder. Beneficiaries of family foundations may include natural persons (also the founder himself) or non-government organisations engaged in public benefit activities.

Family foundations can conduct business activities of strictly defined scope, namely:

sale of property, provided that the property was acquired for re-sale (this requirement will not apply to shares, stocks and other securities, i.e. these can be purchased and sold by foundations).
lease, rental or provision of access to assets for use on other grounds;
joining commercial companies, investment funds, cooperatives or entities of similar nature, having their registered place of business in Poland or abroad, as well as participation in such companies, funds, cooperatives and entities;
purchase and sale of securities, derivative instruments and similar rights;
granting loans to beneficiaries of the family foundation and its subsidiaries;
purchase and sale of foreign currencies which belong to the family foundation in order to make payments connected with the operations of the family foundation;
manufacture of plant and animal products (subject to certain exceptions);
forest management.

MAJOR LEGAL ISSUES

A family foundation needs to be established upon a notarial deed, and registered in a register of family foundations modelled on the register of entrepreneurs of the National Court Register, which will be administered by the District Court in Piotrków Trybunalski. There are no restrictions on names to be given to family foundations as long as the name includes the words “Family Foundation”. Family foundations will acquire legal personality upon their entry in the register of family foundations. The foundation may be established by more than one founder.

If a beneficiary of the family foundation is a natural person, the foundation may in particular cover the costs of the beneficiary’s maintenance and education, and for beneficiaries that are non-government organisations engaged in public benefit activities – support the public benefit activities within the meaning of Article 3(1) of the Act on Public Benefit Activity and Voluntary Services of 24 April 2003.

Assets accumulated by family foundations may be distributed to the foundation beneficiaries directly in the form of benefits, i.e. in the form of transfer of the foundation’s assets to the beneficiary or giving them to the beneficiary for use, including money, things or rights, according to the statutes of the foundation and the list of beneficiaries.

The following steps will be required to establish a family foundation:

making a statement on establishment of a family foundation in the form of a deed or a will;
drawing up the statutes;
preparation of the inventory of assets;
appointment of governing bodies of the family foundation, as required by the Act or the statutes;
contribution of the founding capital prior to registration on the register of family foundations, if the family foundation is established in the form of a deed, or contribution of the founding capital within two years of registering the foundation in the register of family foundations if the family foundation is established in the form of a will;
registration on the register of family foundations.

Governing bodies in family foundations

The act provides for the managing board, the general meeting of beneficiaries (mandatory bodies) and the supervisory board (optional) as the governing bodies of family foundations. Members of the bodies will be appointed at the founder’s discretion.

Foundation statues – major elements

The statutes of the family foundation should include, without limitation: the specific object/purpose of the family foundation, the value of the founding capital, the manner of determining the beneficiaries and the scope of the beneficiaries’ rights. The statutes may also define other aspects such as guidelines concerning investment of the family foundation assets.

The minimum amount contributed by the founder to the foundation was set at PLN 100,000, and it may be contributed in the form of e.g. shares in companies or ownership of real property. It should be emphasized that the family foundation is liable jointly and severally with the founder for his liabilities arisen before the foundation was established, which includes alimonies. This liability cannot be excluded or limited without the creditor’s consent. The aforesaid liability of family foundations is limited to the value of assets and property contributed by the founder as at the time of acquisition, at the prices applicable at the moment of satisfying the creditor’s claims.

Beneficiaries may have benefits awarded on condition of or subject to a certain date (e.g. finishing studies/graduation). Importantly, the founder will not be liable for commitments incurred by the family foundation.

Changes to inheritance law

The bill also provides for a number of changes to the inheritance law, and more specifically to provisions governing the reserved portion (legitime). According to the new provisions, it is possible for the eligible party to waive the right to the reserved portion, to have it spread into instalments, and in exceptional circumstances – to reduce its value. Additionally, the eligible party can demand that the reserved portion be increased from the founding capital of the foundation, where the benefit awarded to him from the foundation will be included in the sum total of the reserved portion.

Audits of foundations

Family foundations will be subject to audits of management of the family foundation’s assets, commitments and public law liabilities incurred and paid, in terms of their accuracy, reliability and compliance with the law, the objects of the family foundation and its documents. Audits will be carried out by auditing firms or teams of auditors appointed by the general meeting of beneficiaries consisting of: a registered auditor, a tax advisor, an advocate or a legal counsel. Audits will need to be made at least once every four years and for family foundations whose financial statements are subject to audits required by the Accounting Act – annually, before approval of the financial statements.

MAJOR TAX ISSUES

Income tax on family foundations

Family foundations will be exempt from CIT within the scope of the business they can pursue. The exemption from CIT will apply to gains from current activities of the foundation, such as income from trading in shares, securities, financial instruments, dividends, interest on loans granted to beneficiaries and subsidiaries of the foundation or income from lease and rental of property (e.g. real estate). Also assets received from the founder or other persons will not result in payment of CIT. Family foundations will only be required to pay tax on income from buildings (if there are prerequisites for liability in this respect).

Distributions from family foundations, both in the form of benefits for the beneficiaries and assets from dissolution of the foundation, will be subject to 15% CIT. In the latter situation, the foundation can reduce the taxable base by the value of the assets contributed by the founder which was not previously recognized as tax costs.

The new regulations do not provide for the possibility to combine family foundations and the Estonian CIT or preferential rules of taxation of assets transferred to the family foundation from foundations operating in other countries.

Taxation of family foundation beneficiaries

Payments made to beneficiaries and assets from dissolution of the foundation will be exempt from the tax on inheritance and gifts. If the founder or his next of kin (his spouse, descendants and relatives in the ascending line, stepchild, siblings, stepfather or stepmother) are recipients of such gains, an exemption from PIT can apply. However, the scope of the exemption will depend on who contributed assets to the family foundation and what the value of the assets was. If the exemption from PIT does not apply, the benefit or assets from dissolution of the foundation will be taxable with personal income tax at the rate of 15%.

Should you have any question concerning family foundations or if you consider establishing one, you are welcome to contact us. We are ready to support you in analysing whether a family foundation is a good solution in your case, and assist you in setting up a foundation, as well as in ensuring its efficient operation.

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