In just a few days, it will be possible to carry out intergenerational succession in Polish companies through the vehicle of a family foundation. This new legal entity is designed to meet the needs of business owners, who until now have been condemned to relatively limited choices under general provisions, or could choose foreign jurisdictions to set up a family foundation (e.g. in Austria, Liechtenstein, Malta, or the Netherlands).
In drafting the Family Foundations Act of 26 January 2023, the parliament created an institution distinct from other legal entities in Poland. In addition to its many advantages, business owners considering using a family foundation should also learn about its limitations, so that the process of intergenerational succession proceeds as intended.
In this article we discuss the limitations of a family foundation for running a business, as the act establishes a fixed catalogue of the types of business activities that a family foundation can conduct.
Under Art. 5(1) of the act, the business activities of a foundation are exclusively limited to:
- Disposal of property, unless the property was acquired solely for the purpose of further disposal
- Lease, rental or making property available for use on any other basis
- Joining and participating in commercial companies (or partnerships), investment funds, cooperatives and entities of a similar nature, with their registered office in Poland or abroad, as well as participation in other companies, funds, cooperatives and entities
- Purchase and sale of securities, derivatives and rights of a similar nature
- Providing loans to:
- Companies in which the family foundation holds shares
- Partnerships in which the family foundation participates as a partner
- Trading in foreign means of payment belonging to the family foundation for the purpose of making payments related to the activities of the family foundation
- Production of plant and animal products processed other than industrially, with the exception of processed plant and animal products obtained in the course of special units of agricultural production activities and products subject to excise tax, provided that the amount of plant or animal products derived from own culture, breeding or rearing, used in the production of a given product, constitutes at least 50% of the product
- Forest management
Agricultural and forest activities (points 7–8) may be performed by a family foundation exclusively in relation to an agricultural enterprise.
Conducting activities outside the permitted catalogue
As may be seen, the foregoing catalogue allows for conducting holding activity, leasing of foundation property, investment, lending, and conducting an agricultural enterprise. This demonstrates that, in principle, the parliament assumed that (except for running an agricultural enterprise) a family foundation should carry out exclusively passive activity. Since the catalogue of activities specified in Art. 5 of the Family Foundations Act is exhaustive, conducting other activities by a family foundation would violate the act.
However, the consequences of a family foundation conducting business beyond the established scope are unclear. In this regard, the law refers only to the tax consequences of carrying out such activities, e.g. imposing an increased (25%) corporate income tax rate for carrying them out (CIT Act Art. 24r(1)). We write more extensively about the taxation rules for such activity in the article “Taxes and the family foundation.”
Therefore, it seems reasonable to conclude that violation of the ban on conducting other activity does not invalidate the transactions made against the ban, but will only result in negative tax consequences. If such transactions were regarded as invalid, they would not be subject to taxation. Therefore, the sanction for violating the restriction on the subject of the family foundation’s activity should be sought under public law, not civil law.
It can also be assumed that violation of the business ban will not always provide grounds for judicial oversight of the foundation’s activity under Art. 88 and 89 of the Family Foundations Act. Indeed, the basis for such review by the registry court would be management of the family foundation in a manner obviously contrary to its purpose or the interests of its beneficiaries. Thus, if conducting business beyond the scope of Art. 5 does not violate the purpose of the family foundation or the beneficiaries’ interests, the registry court will have no grounds to impose a fine or, in extreme cases, dissolve the family foundation.
These doubts call into question the purpose of Art. 5 of the act. From the beginning, the provisions on the ability of a family foundation to conduct business activity were the subject of extensive discussion. As a result, during the legislative process, the total ban on conducting business activity originally proposed was reduced to its current form. From the course of this discussion, it can be concluded that the ban or restriction of a family foundation’s ability to conduct business is aimed at protecting the assets contributed to the family foundation. But if there are no civil-law consequences for violating the ban on conducting certain business activity, Art. 5 does not appear to guarantee the level of protection it was intended to provide.
Sceptics objecting to the ban on broader business activity argue that when receiving assets from the founder (and other persons), a family foundation should be able to multiply them. Only this way can the assets accumulated by older generations serve future generations for as long as possible. With the model adopted in the act, this assumption still seems feasible, as ways to operate businesses within family foundations do exist.
Contributing a company to a foundation
Primarily, a family foundation can be a shareholder in companies (or a partner in partnerships). Thus the conduct of business by such companies will not be subject to the ban or the negative tax consequences from violating the ban. So if the founder is an owner of a company or partnership, he or she may contribute that interest to the family foundation (the shares in a company or the totality of rights and obligations of a partner in a partnership).
The contribution of such rights to a family foundation should be made with due regard to the law and internal corporate requirements for disposing of such assets. When planning for intergenerational succession through establishment of a family foundation after the death of the founder, it is necessary to appropriately review the articles of association or partnership agreements to avoid any internal restrictions of a corporate nature.
However, if an individual business operator (e.g. sole proprietor) would like to establish a family foundation, as the founder he or she can contribute the business in kind to an existing company or partnership, or convert the business into a limited-liability company. Then the resulting shares or totality of rights and obligations in the partnership can be contributed to the family foundation.
The choice of one of these options for reorganising a business will depend on a number of factors, particularly the time available, the complexity of the business structure, the regulatory environment, the contracts to which the business is a party, and tax issues.
But it is a risky idea to contribute the business itself to a family foundation, and then contribute it in kind to a company or partnership owned by the family foundation. In such a scenario, it is necessary to transfer the same business twice to the target entity, increasing the exposure to risks associated with in-kind contribution of the business.
Accordingly, individual business operators who would like to establish a family foundation in the event of their death should first ensure that their business operates in the form of a commercial company or partnership. This will enable the family foundation to become a shareholder or partner in the entity running the business without too many problems after the founder’s death.
It is clear that the family foundation was not created as a vehicle for its founder’s direct business operations. However, it is possible to continue the operations of the business under the umbrella of a family foundation. While there is a ban on direct conduct of certain business activities under the Family Foundations Act, the ban is not airtight and family foundations may attempt to exploit that leeway. However, the management boards of family foundations deciding to conduct business in violation of the ban will have to take care that such activities do not violate the purpose of the foundation or the interests of the beneficiaries. That could risk a fine or even lead to dissolution of the family foundation.
Paweł Szumowski, attorney-at-law, M&A and Corporate practice, Wardyński & Partners