The family foundation on the home stretch: major assumptions of the bill on family foundations
FAMILY FOUNDATION
As of the date of this Alert, the bill was submitted to the President and Marshal of the Senate for further proceedings.
The explanatory memorandum indicates that, according to estimates, nearly 830 thousand companies in Poland are family businesses which generate revenues to the overall value of PLN 322 billion per year, and thus their contribution to the GDP is at level of ca. 18%. The data gathered by Instytut Biznesu Rodzinnego [Family Business Institute] shows that approx. 57% of family businesses plan succession over the next five years.
ASSUMPTIONS UNDERLYING THE ACT
The bill on family foundations (“Bill”) is prepared on the assumption that a family foundation is to facilitate succession of family businesses by creating solutions for continuation of business activity and protection of property over a time span longer than one generation. The intention underlying formation of family foundations is, without limitation, to protect family enterprises from being sold or losing their familial character, but also to prevent transfer of property and assets abroad.
The bill provides that a family foundation is a legal person established upon a deed of incorporation by a founder or upon a will. The bill further provides that only a natural person fully capable of performing legal transactions can act as the founder, i.e. the person contributing/transferring assets to the foundation. The beneficiary, i.e. the person deriving benefits from said assets, may be a natural person or a non-government organisation engaged in public benefit activities. Interestingly, the bill does not require any kinship between the founder and the beneficiary.
ESTABLISHING A FAMILY FOUNDATION
According to the Bill, 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, 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”. The family foundation will acquire legal personality upon its 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, as referred to in Art. 3 (2) of the Act on Public Benefit Activity and Voluntary Services of 24 April 2003 (Journal of Laws of 2022 item 1327, 1265 and 1812), which are engaged in public benefit activities – the foundation may support the public benefit activities within the meaning of Art. 3(1) of the said Act.
The following steps will be required to establish a family foundation:
- making a statement on establishment of a family foundation upon a notarial deed or a will;
- drafting 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 upon a deed of incorporation, or contribution of the founding capital within two years from registering the foundation in the register of family foundations if the family foundation is established in a will;
- registration on the register of family foundations
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 beneficiary and the scope of the beneficiary’s rights. The statutes may also define other aspects not provided for in the bill, such as guidelines concerning the 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 with the founder for his liabilities arisen before the foundation was established, including for 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 prices applicable at the moment of satisfying the creditor’s claims.
Beneficiaries may have payments awarded on condition of or subject to a certain date (e.g. finishing studies/graduation). The bill provides that the founder will not be liable for commitments incurred by the family foundation.
The bill on family foundations does not explicitly provide whether the contribution of assets to a family foundation is liable to the corporate income tax. According to the Ministry of Finance, contribution of assets to the foundation should not result in an obligation to pay income tax on the value of assets acquired by the foundation, but the wording of the bill as adopted by the Sejm does not include provisions which unequivocally regulate this aspect.
According to the Bill, the family foundation can engage in business within the meaning of Art. 3 of the Entrepreneurs Law of 6 March 2018 only within the scope of:
- selling property, unless such property was acquired solely for the purpose of sale;
- lease and tenancy of property or making it otherwise available for use;
- 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 capital companies in which the family foundation holds shares or stocks,
- to partnerships in which the family foundation participates as a partner,
- to beneficiaries;
- purchase and sale of foreign legal tender which belongs to the family foundation in order to make payments connected with the operations of the family foundation;
- running an enterprise of agricultural farm.
Within the scope indicated above, the family foundation, as a new payer of corporate income tax, benefits from a tax exemption. Taxation applies exclusively to income derived by the family foundation from a business activity which is beyond the scope of activity of the family foundation indicated in the act. In this case, however, the legislator provided for taxation of the family foundation’s income with a penalty rate of 25%. The penalty rate is intended to counteract situations where the family foundation is used to conduct business which is beyond the scope indicated in the act, the income from which would be subsequently distributed to the founder and members of his close family with no need to pay income tax, as the bill provides for exemption from personal income tax of revenues from benefits received by the founder, his / her spouse, descendants, siblings and other persons belonging to the “zero” group. The exemption of family foundations does not apply to tax on revenue from buildings, referred to in Art. 24b of the CIT Act.
Assets accumulated by the family foundation may be distributed to the foundation beneficiaries directly, in the form of benefits referred to in Art. 3(2) of the Bill, 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 income thus generated for the beneficiary is taxed at 15%, but, as mentioned above, revenues from benefits made to the beneficiary who is the founder or a member of the founder’s close family are exempt from personal income tax.
If the family foundation is dissolved, both with respect to personal income tax and the corporate income tax, the revenue generated by taking up the assets of the dissolved foundation is taxed at 15%, taking into account the income tax exemption of the founder’s revenue or revenue of his/her close family member. A solution important for attractiveness of the family foundation, introduced to the act as a result of requested corrections, consists of the mechanism of determining the value of the foundation’s assets liable to tax in connection with dissolution of the foundation. The bill provides that the base for taxation, in a situation where the family foundation is dissolved, is the value of the foundation’s assets reduced by the tax value of the assets. The tax value of the foundation’s assets is the value not previously recognized as deductible costs in any form, which was adopted by the founder as the tax cost in case the asset was sold for consideration by the founder immediately before being contributed to the family foundation, but up to its market value.
GOVERNING BODIES IN FAMILY FOUNDATIONS
The act provides for the managing board, the general meeting of beneficiaries (a mandatory body) and the supervisory board (optional) as governing bodies of family foundations, with members of the bodies being appointed at the founder’s discretion.
AUDITS OF FOUNDATIONS
According to the bill, an auditing firm or a team of auditors appointed by the general meeting of beneficiaries shall audit the 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. The auditing team consists of a registered auditor, a tax advisor, an advocate or a legal counsel. Audits are carried out at least once every four years of operation of 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, to defer the payment term and to reduce its value. Additionally, the eligible party can demand that the reserved portion be increased from the founding capital of the foundations, whereas the benefit awarded to him from the foundation is included in the sum total of the reserved portion.
DOUBTS
The bill on family foundations provides for a solution which was definitely in demand among Polish entrepreneurs, yet some of its provisions give rise to certain doubts.
As regards determination of beneficiaries, the bill does not provide for the possibility to identify a broad group of beneficiaries and requires that the founder specifically lists them by name and defines their respective rights.
Furthermore, the family foundation can be dissolved by its beneficiaries upon a unanimous resolution, if the beneficiaries consider its continued operation purposeless. Consequently, protection of the founder’s assets from liquidation may not be applicable in practice.
Bearing in mind the recent judgment of the Court of Justice of the European Union of 22 November 2022 (case C-37/20 and C-601/20) on registers of beneficial owners, the scope of information submitted to the register of family foundations, such as the personal number (PESEL) of beneficiaries, should be considered excessive.
What remains unclear is the question of taxation of the family foundation’s revenues in connection with contribution of property to the foundation: according to the Ministry of Finance such revenues will not be taxed with corporate income tax, but there are doubts in this respect as the act contains no provisions that would clarify this issue.
Also the wording of Art. 6(1) of the Bill poses certain doubts. It provides that the scope of business operated by the family foundation includes the sale of property unless such property was acquired solely for the purpose of re-sale. The current wording of the provision does not explicitly indicate the conditions associated with the sale of assets so that their sale can be classified as falling within the scope of activity of the foundation, as referred to in the bill. If this provision is construed broadly, there is a risk that substantially each or nearly each purchase of things or (which is of particular importance) rights is made with the intention of their re-sale. This will be the case particularly with respect to assets of the foundation such as securities which, as a tool for investing capital, are always purchased with the intention of their subsequent re-sale. The question whether the sale of such assets is within the permitted scope of activity operated by the family foundation will be answered on the basis of practical application of this provisions by the tax authorities or, possibly, by administrative courts.
SUMMARY
Despite doubts concerning certain provisions of the act, the government’s bill on family foundations should be evaluated as positive. Intelligible rules of registration, affordable capital, tax preferences with respect to payments/benefits for the founder and close family members, and taxation applicable to this part of the foundation assets only which constitutes the increment of its value, mark a good step towards continued growth and protection of family businesses with a long history, and offer a fair chance that a large portion of the Polish capital will stay in Poland. As the legislative process is still underway, we shall update you on the next stages.
KONTAKT
E: marcin.matyka@pl.Andersen.com
T: +48 22 690 08 60
M: +48 669 768 444
E: magdalena.patryas@pl.Andersen.com
T: +48 32 731 68 84
M: +48 502 392 419
