Along with the provisions allowing for establishment of a family foundation, entirely new tax provisions are being introduced, with attractive rules for taxation of asset transfers and foundation activities, but also a slightly too varied patchwork of tax rates.
This article discusses the taxation of events accompanying the daily operation of a family foundation in Poland.
Transferring property to a family foundation
Transferring property to a family foundation can take two forms:
- Contribution of initial capital to the family foundation by the founder
- Secondary transfers of property rights by the founder or other persons.
Regardless of which of these two avenues is used to enrich a family foundation, such an event does not involve the obligation for the foundation to pay corporate income tax.
Ongoing activity of the family foundation
A family foundation enjoys a subjective exemption from corporate income taxation. In practice, the exemption will apply to income that does not come from the business activity of a family foundation, or comes from such activity but has its source in:
- Disposal of property (but not commercial activity)
- Lease, rental or other provision of property for use
- Participation in and joining commercial companies (or partnerships), investment funds, cooperatives and entities of a similar nature
- Purchase and sale of securities, derivatives and rights of a similar nature
- Provision of loans to beneficiaries, companies in which the family foundation holds shares, and partnerships in which it participates as a partner
- Trading in foreign means of payment belonging to the family foundation for the purpose of making payments related to the activity of the family foundation
- Production of plant and animal products (with restrictions)
- Forest management.
Taxation of the ongoing activities of a foundation will only arise in three situations.
First, the income from rental, lease or other agreement of a similar nature, the subject of which is an enterprise, an organised part of an enterprise, or assets dedicated to carrying out the activities of a beneficiary, the founder or an entity related to them or the family foundation (the threshold of ties is set at a reduced level of 5%) will not benefit from the tax exemption. The income tax rate that will apply is 19%.
Second, the tax exemption does not apply to the tax on income from buildings. This means that a family foundation will pay income tax if it owns buildings in Poland which have been delivered for use under an agreement and the initial value of the buildings is higher than PLN 10 million. The corporate income tax will be 0.035% of their value for each month.
Third, it is taxable for a family foundation to conduct business activity not included in the foregoing statutory catalogue. The tax will be 25% of the tax base, i.e. the family foundation’s income from taxable activity minus deductible expenses, but only expenses proportionately attributable to the taxable activity of the family foundation. In this case, the family foundation cannot take advantage of the following exemptions and deductions:
- Subjective exemption from income tax
- Deduction of donations from the tax base
- R&D tax credit
- Prototype tax relief
- Pro-growth tax relief
- Consolidation relief
- Tax relief for execution of an initial public offering
- Tax relief for sponsors of sports, culture and education
- Discount on payment terminals
- Bad-debt relief.
The first of these taxes (on lease of an enterprise etc) will have a different impact than the others on the overall taxation level of the family foundation. At the moment of making by a family foundation of transfers subject to corporate income tax, the family foundation should be able to reduce the tax on these transfers by the amount of tax already paid for the period not covered by the statute of limitations.
In the case of the other two taxes (on buildings and extraneous business), such a deduction will not be possible, and the tax paid will only reduce the value of the transfers made, which may significantly increase the effective tax level of the family foundation.
Distribution of benefits and property from the foundation
Taxation of foundations
The foundation will pay a flat-rate corporate income tax in the amount of 15% of the value transferred or made available directly or indirectly at disposal of:
- Benefits, i.e. in the case of transferring assets by the foundation to a beneficiary or giving the beneficiary use of assets in accordance with the statute and the list of beneficiaries
- Property in connection with dissolution of the family foundation
- Benefits treated as hidden profits.
While the first two categories speak for themselves, the third requires a broader commentary. Hidden profits include:
- Interest and other remuneration on a loan made to a family foundation by a beneficiary, founder, or an entity related to a beneficiary, founder or family foundation (the threshold for the existence of ties was lowered to 5%)
- Gifts or other gratuitous or partially gratuitous benefits, other than those expressly referred to in the regulations governing family foundations, provided directly or indirectly to a beneficiary, founder, entity related to the beneficiary, founder or the family foundation (the threshold for the existence of ties was lowered to 5%)
- Benefits to the beneficiary, founder, or an entity related to the beneficiary, founder or family foundation for consulting services, accounting services, market research, legal services, advertising services, management and control, data processing, employee recruitment and staffing services, guarantees and warranties and benefits of a similar nature, and all kinds of fees and charges for the use of, or the right to use, copyright or related property rights, licences, industrial property rights and knowhow (the threshold for the existence of ties was lowered to 5%)
- Profits from non-arm’s-length transactions made between the family foundation and a beneficiary, founder, or an entity related to a beneficiary, founder or the family foundation
- Loans granted by the family foundation to a beneficiary, for the portion that was repayable in a given tax year and was not repaid by the deadline for filing the annual tax return
- Loans granted by the family foundation to a beneficiary for a period of 10 years or more, or for a period of less than 10 years if the final term of the agreement was at least 10 years.
The tax base is the value of the benefit or property flowing out of the foundation, with one exception. In the event of dissolution of a family foundation, the value of the property to be distributed is to be reduced by the tax value of the property contributed by the founder(s) (the tax-deductible costs that would have been incurred if the asset had been disposed of for payment before it was contributed to the family foundation), not exceeding its market value.
Taxation of beneficiaries and others
The benefit to natural persons and the release of property to them in connection with the dissolution of a family foundation are subject to personal income tax and constitute income from “other sources.” The regulations provide important preferences for the founder and his/her closest relatives:
- The founder and persons covered by the exemption from inheritance and gift tax (the “zero” group), i.e. spouse, descendants, ascendants, stepchildren, siblings, stepfather or stepmother (these persons must be beneficiaries to benefit from the exemption in the case of benefits paid), will be exempt from income tax
- 10% tax will be paid by persons who are classified in the Inheritance and Gift Tax Act in tax group 1 or 2 in relation to the founder, i.e. sons-in-law, daughters-in-law and parents in-law, descendants of siblings, parents’ siblings, descendants and spouses of stepchildren, spouses of siblings and siblings of spouses, spouses of spouses’ siblings, and other descendants’ spouses
- 15% tax will be paid by others.
In the context of the foregoing benefits, the origin of contributions to the family foundation is of strategic importance. When the founders (understood as the founder together with his/her spouse, descendants, ascendants or siblings) or the foundation itself (understood as any others) contribute property to a family foundation, an inventory of this property is made, together with an indication of the proportion of contributions. This proportion will determine the extent to which the aforementioned tax exemption and preferential 10% tax rate can be applied.
Additionally, the foregoing provisions should be applied taking into account any tax treaties that may be applicable, subject to presentation of a certificate of tax residence, which can often result in non-taxation of foreign beneficiaries in Poland.
Taxpayers will not be required to pay social insurance, health insurance contributions or the solidarity levy.
The Personal Income Tax Act does not contain a reference to benefits qualifying as hidden profits, which means that such donations may be subject to income tax or inheritance and gift tax under the general rules.
Inheritance and gift taxation of beneficiaries
The receipt of a benefit from a family foundation and the receipt of property in connection with dissolution of a family foundation are not subject to inheritance and gift tax. Therefore, it can be inferred that this tax could be applied to some of the gains from hidden profits.
The explanatory memorandum to the draft Family Foundations Act indicates that the VAT consequences in terms of transactions and events carried out in connection with the establishment and operation of a family foundation are determined under the specific factual situations based on existing VAT provisions, taking into account the regulations arising from the VAT Directive and other EU provisions. The Family Foundations Act did not make any changes in this regard.
Liability of the foundation for tax obligations of the founder, and liability of third parties for the tax obligations of the foundation
A family foundation is jointly and severally liable with the founder for his/her tax and social insurance arrears incurred before establishment of the foundation. The scope of liability is limited to the value of the assets contributed by the founder to the family foundation.
Members of the governing bodies of the family foundation are jointly and severally liable for arrears with all their assets, and the provisions governing the liability of members of the management board of companies apply accordingly.
Michał Nowacki, attorney-at-law, tax advisor, Wojciech Marszałkowski, adwokat, Monika Niewińska, Tax practice, Wardyński & Partners