Family foundation

Family foundation

While (still) a novelty in Poland, family foundations are very common in Western European countries. We will spare you the cliché about how they are supposed to serve as a family treasury. For us, they are simply a solution that is supposed to make it easier for Polish entrepreneurs to build family wealth for future generations. To this end, the Family Foundation Act provides that assets accumulated by the founder may remain in “the hands of the family” (i.e. in a foundation), while family members or other people designated by the founder (beneficiaries) become entitled to obtain benefits specified by the founder in the foundation’s by-laws. In brief, the family foundation allows to lay down succession rules that may differ from more strict rules of Polish inheritance law.

The Polish family foundation became one of the most successful tools for mananaging of the family assets with over 3000 family foundations established during the first year after the Family Foundation Act came into force (including number of family owned businesses listed on the Warsaw Stock Exchange).

Who is it intended for?

A family foundation may be used not only as a succession planning tool, but also as an investment vehicle.

The transfer of assets to a family foundation should, therefore, be considered by any entrepreneur who:

• would like to preserve family estate for future generations
• has no obvious successors whom they could entrust managing business affairs
• would like to separate ownership and management of family estate from risks related to personal or family circumstances
• would like to specify how and to what extent family estate may be used by family members and other people close to that entrepreneur

Family foundation and taxes

Building family wealth will also be facilitated by a special tax regime applicable to family foundations.

Within such a regime no tax is due on:

• the transfer of family estate to a family foundation
• the income of family foundation except for income derived by a family foundation from business activity falling outside the scope allowed by Polish regulations (please see below)
• the income of beneficiaries included in the “zero group” (e.g. the founder’s spouse, children or siblings) received in a form of distributions made by family foundation

Business activity of family foundation

Family foundation may conduct any business activity. However, only the income from the following activities is tax exempt:

• disposal of assets, unless such assets were acquired solely for the purpose of further disposal (the limitation to asset acquired solely for the purpose of further disposal does not apply to transactions involving shares, securities and financial instruments);
• leasing, renting, or making assets available for use on another legal basis;
• joining commercial companies, investment funds, cooperatives, and entities of a similar nature, whether based domestically or abroad, as well as participating in such companies, funds, cooperatives, and entities;
• acquisition and disposal of securities, derivatives, and rights of a similar nature;
• granting loans to: (i) companies in which the family foundation holds shares or stocks, (ii) partnerships in which the family foundation is a partner, (iii) beneficiaries;
• trading in foreign currencies owned by the family foundation for the purpose of making payments related to the foundation’s activities;
• production of plant and animal products processed in a non-industrial manner,
• forest management.

The income from the business activity of the family foundation being outside of the above scope is subject to 25% income tax. Any other income of the family foundation is exempt from income tax, while any distribution to beneficiaries of family foundation is subject to 15% income tax at the level of family foundation. Distribution from family foundation to beneficiaries may be taxed also at the level of beneficiaries depending on their family ties with founders (distributions to the closest family members are generally tax exempt).