On 14 December 2022 the lower house, Sejm, passed a bill on family foundations. The law was then sent to the Senate, where amendments were made to it, now pending before the Sejm. Regardless of these legislative works, it is expected that the law will come into force 3 months after its promulgation. It should therefore be possible to establish a family foundation as early as the first half of 2023.
The essence and purpose of a family foundation
Following the example of other countries, in 2023 the institution of a family foundation will be introduced in Poland. Its purpose is to facilitate intergenerational succession without the heirs liquidating the testator’s assets. It is intended, in particular, to protect the company from the negative consequences of succession processes, including those related, for example, to the lack of some heirs’ interest in continuing the business or a large number of heirs. A family foundation will professionally manage the assets it receives and provide benefits to beneficiaries. The idea is that this solution should ensure the longevity of a business created by a testator if it is contributed to a family foundation.
A family foundation will have legal personality. It may only be established by an individual by drawing up a foundation deed before a notary or a will providing for the establishment of a foundation. In addition to the founder, beneficiaries of the foundation may include individuals or non-governmental organizations engaged in public charity activities, which, pursuant to their respective statutes, will be entitled to receive benefits from the foundation (or property following its dissolution).
The foundation’s charter will define its purpose, the manner of determining its beneficiaries and the scope of their powers, as well as the duration of the foundation and the principles of its liquidation. The founder will also be allowed to specify additional guidelines for investing the foundation’s assets and set rules for awarding benefits to beneficiaries (including stipulation of a condition or term).
Governing bodies of a family foundation
A family foundation will operate through a board of directors and may be subject to internal control exercised by a supervisory board. The beneficiaries, nominated by the founder, will form a beneficiaries meeting to be held on certain occasions (e.g., when supplementing the composition of a particular governing body of the foundation or approving the financial statements). This is intended to ensure that the family has the necessary influence on the most important matters related to the family foundation’s operations over many years.
Business operations
The bill allows a foundation to carry on business activities but provides for an exhaustive list of the types of permitted activities. Pursuant to the bill, the foundation will be allowed to:
- dispose of property, unless it was acquired solely for the purpose of further disposal,
- participate in commercial companies, investment funds, cooperatives and similar entities,
- purchase and sell securities, derivatives and similar rights (e.g., shares and stocks),
- extend loans to affiliated entities, trade in foreign currency for payments,
- carry on business related to rental, lease, provision of property, operate a farm.
Succession issues
The Family Foundation Law will also modify provisions of the succession law concerning the legitime by introducing the possibility for beneficiaries to formally waive the legitime even before opening the will, to pay it in instalments, to reduce its amount or to defer its payment. The benefits paid by the foundation to the beneficiaries will also reduce the amount of the legitime due to them.
Tax issues
A family foundation will generally be exempt from CIT. Thus, the establishment of a family foundation and the transfer of assets to it will not be subject to taxation.
What is more, the foundation’s income from its operations (so long as they fall within the abovementioned exhaustive list) will also be exempt from CIT. As a result, the family foundation will not pay tax on an ongoing basis on, for example, dividends and other capital gains received from companies in which it will be a shareholder until the funds are distributed.
A family foundation will pay 15% CIT only when benefits are transferred to the founder or beneficiaries. However, if its activities go beyond the permitted statutory scope, this part of the foundation’s income will be taxed at a “penalty” 25% CIT rate.
With respect to beneficiaries, the payment of benefits by the foundation will be exempted from personal income tax as well as inheritance and gift tax in the situation where the beneficiaries are individuals from the so-called zero tax group (the founder’s immediate family). If the beneficiaries are unrelated to the founder, the benefits received from the foundation will be subject to 15% personal income tax.
The liquidation of the foundation and the related distribution of assets will also be subject to 15% corporate income tax – the bill as it stands provides for the possibility of recognizing deductible expenses at the time of liquidation, i.e., reducing income by the historical tax value of the assets contributed to the foundation by the founder.
The family foundation, as proposed, can become an attractive vehicle for effective succession planning of family businesses, while allowing for tax-efficient multiplication of family assets. In this way, the foundation can serve as a succession vehicle, as well as act as a holding and investment entity.
Therefore, when planning the reorganization of a family business, it is worth thinking about this solution and considering the benefits of establishing a family foundation, which could become a popular instrument for asset preservation and investment.
By Cezary Przygodzki, Dariusz Stolarek, Partners, Michal Bernat, Managing Counsel, and Damian Bugaj, Senior Associate, Dentons