Family Foundation - more information
Can the transfer of assets to a family foundation be challenged through an actio pauliana?
It may happen that the founder, after establishing the foundation and contributing property to it, incurs new obligations that it does not fulfill. A family foundation is not liable for such obligations (except for maintenance), but creditors may use the so-called Pauliana action if the founder transfers his property to the foundation to the detriment of creditors. We speak of detriment to creditors when, as a result of a specific act, the founder has become insolvent or has become insolvent to a greater extent than he was before it was carried out. In other words, he has disposed of property that could be used to satisfy creditors. It should be explained here that the property of a family foundation can only have four sources of origin: property contributed by the founder to the foundation’s founding capital, donation, inheritance and property acquired from funds obtained from the foundation’s business activity. A founder who wants to transfer property to the foundation will use a donation for this purpose.
According to art. 527 of the Civil Code, when as a result of a legal act of the debtor (founder) performed to the detriment of creditors, a third party (family foundation) has obtained a financial benefit, each of the creditors may request that this act be recognized as ineffective in relation to him, if the debtor acted with the knowledge of the detriment of the creditors, and the third party knew about it or, with due diligence, could have learned about it. Moreover, in the case of a gratuitous act (e.g. donation), there will usually be a presumption that the transfer of property was made to the detriment of creditors. In practice, the so-called Pauliana actio can be an effective tool to protect the founder’s creditors.
Should the assets to be contributed to the family foundation (other than cash) be valued for this purpose?
Should the assets to be contributed to a family foundation (other than cash) be valued for this purpose?
In this context, the provision of Article 19, paragraph 1 of the Family Foundation Act is important, as follows: “1. Whenever the Act refers to the value of assets contributed to a family foundation or the assets of a family foundation, this shall be understood as the market value of the assets contributed in a form other than cash, determined on the day the assets are contributed, in accordance with the principles set out in the Corporate Income Tax Act of 15 February 1992.”
The provisions of the CIT Act are not “compatible” with the operation of contributing assets to a family foundation, as they refer to transactions for a fee, while contributing assets to a family foundation is usually free of charge (e.g. towards the founding fund or by way of donation). However, in the absence of other regulations in the CIT Act, in our opinion it is justified to refer to Article 14 paragraph 2 of the CIT Act. According to this provision, the market value of property and property rights is determined based on market prices used in trade in property, rights, etc. Analysis of this provision leads to the conclusion that for the purpose of contributing an asset to the FR, its market value for the purposes of sale should be determined.
Determining the value of an asset contributed to a family foundation may be of significant importance in the event that such a transaction is subject to VAT (the value of the asset will affect the amount of VAT), as well as in the event of a possible later transfer of a given asset to the beneficiary of the foundation (15% CIT is due on the value of such a benefit according to prices on the day of its implementation).
For these reasons, the assets to be contributed to the family foundation should be valued. In the case of assets for which there are commonly used valuation tools (e.g. passenger cars), such methods can be used. In other cases, especially in the case of particularly valuable assets such as works of art or real estate, the valuation should be prepared by a property valuer.
Is the founder liable for the obligations of the family foundation?
The founder of a family foundation is not liable for its obligations, both civil and tax, but the family foundation may be liable for his obligations (question: Is the property contributed to the family foundation safe?).
The founder may be liable for the tax obligations of the foundation if he is also a member of its board (question: What liability do the members of the board of a family foundation bear?)
Is the beneficiary liable for the obligations of the family foundation?
The beneficiary of a family foundation is not liable for its obligations, both civil and tax. A family foundation is a separate legal entity, which means that its assets are separate from the assets of the beneficiaries. The foundation is liable for obligations related to the conducted business activity only with its assets.
A beneficiary may be liable for the tax obligations of the foundation if he or she is also a member of its board (question: What liability do the members of the board of a family foundation bear?)
What are the responsibilities of the board members of a family foundation?
Members of the board of a family foundation are not liable for the foundation’s civil liabilities, e.g. for invoices issued to the foundation related to its business activity. Therefore, a family foundation’s contractor cannot demand payment directly from a member of the board of a family foundation.
Members of the board of a family foundation are liable for its tax arrears. For example, if the foundation conducted business activity and is in arrears with the payment of VAT, the tax office may impose the obligation to pay this tax on the members of the board and initiate enforcement proceedings against them. The legal basis in this respect is Article 116a of the Tax Ordinance. Liability covers not only tax arrears, but also default interest, costs of enforcement proceedings and other liabilities specified in Article 107 § 2 of the Tax Ordinance. The liability of the members of the board is joint and several, which means that each member of the board may be obliged to cover the entire arrears.
In addition, board members are liable for damages caused to the family foundation if their actions or omissions were contrary to the law or the provisions of the statute, unless they are not at fault. In order to hold a board member liable, the family foundation must prove that the damage was caused by an action or omission of the board member and that there is a causal relationship between this action/omission and the damage. A board member will avoid liability if he proves that he is not at fault, in particular that he made decisions within the limits of justified business risk and based on adequate information (Business Judgement Rule).
Are benefits paid from a foundation to founders who are spouses exempt from taxation?
In individual interpretations of 30 April this year (ref. 0112-KDIL2-1.4011.113.2024.2.JK and 0112-KDIL2-1.4011.114.2024.2.JK), the Director of KIS indicated that if there were several founders from the immediate family, the payment of benefits to a given founder will be exempt from tax (PIT) only proportionally (in proportion to the share of property contributed to the foundation by a given founder). In the discussed interpretations, the Director of KIS stated that:
“Property contributed to a family foundation by way of donation or inheritance by the spouse, descendants, ancestors or siblings of a given founder may, in accordance with Art. 28 sec. 2 item 1 of the Family Foundation Act, may be considered as contributed by this founder only if the spouse, descendants, ancestors or siblings of this founder are not at the same time other founders of the family foundation”.
In connection with this, the benefit for founders, according to the previous approach of the Director of KIS, was exempt from PIT only proportionally. The last proportion is determined in accordance with the provisions of the Family Foundation Act at the time of the last contribution of property to the family foundation, taking into account the value of the property and the status of the persons contributing the property at the time of this contribution, included in the list of property.
“It cannot be considered that since the founders are related to each other in a degree of kinship that qualifies them as the closest family (Article 4a of the Inheritance and Gift Tax Act), for the purposes of determining the proportion of property for income tax purposes, each of the founders contributed it in the amount of 100%.
Change of KIS position after filing a complaint with the Provincial Administrative Court
The Applicant did not agree with the position of the KIS Director and filed a complaint with the Provincial Administrative Court. Without waiting for the verdict, the KIS Director changed the interpretation, taking into account the arguments presented in the complaint. Therefore, in the amended interpretation, the KIS Director indicated that:
“Taking into account the above provisions, it should be stated that a taxpayer who is a founder of a family foundation and at the same time a person who is connected with another founder of this foundation by a relationship referred to in art. 4a sec. 1 of the Act on Inheritance and Gift Tax (spouse, ascendant, descendant, stepchild, sibling, stepfather or stepmother), for the purposes of applying the exemption from art. 21 sec. 1 item 157 in connection with sec. 49 of the Personal Income Tax Act, may add up the proportion of the value of the property, specified in art. 27 sec. 4 of the Act on Family Foundation, contributed to the family foundation by himself and by that other founder.”
The change in the position of the KIS Director means that even if there are several founders (from the immediate family), the entire benefit for each of such founders is subject to the exemption from PIT in its entirety.
Summary
The change in the approach of the KIS Director and the recognition that the proportions of property are added up is a step in the right direction. In our opinion, the change in the KIS approach to donations in such a situation should make establishing family foundations more attractive.
It should be noted, however, that the individual interpretation changed by the KIS Director applies only to spouse founders, and the same problem also occurs in a situation where the founders are also other people from the immediate environment (siblings, parents, children).
Therefore, in similar or other factual situations, any doubts on this subject should certainly be resolved by obtaining an individual tax interpretation. This will provide protection from the tax consequences of the founder and beneficiaries.
Can the FR deduct tax withheld from dividends abroad (in the source country)?
In Poland, in the case of a dividend payment to a family foundation as an entity exempt from CIT, the company paying the dividend does not have to collect and pay a flat-rate dividend tax to the tax office. This was confirmed by the director of the National Revenue Information in individual interpretations issued, e.g. on July 15, 2024 (ref. 0111-KDIB1-2.4010.292.2024.1.MK).
However, a Polish family foundation may hold shares or stocks in foreign companies. According to Polish regulations, the mere accession and participation of a family foundation in foreign commercial companies that are income tax payers in other jurisdictions, including receiving a dividend, falls within the scope of permitted activities of a family foundation and is not subject to taxation at the level of the family foundation.
However, it should be noted that a foreign company paying a dividend may be obliged, under local tax regulations, to collect withholding tax on the dividend paid. In such a situation, the Polish family foundation receives the dividend reduced by the tax due in the source country.
When the foreign subsidiary withholds tax on the dividend, the Polish taxpayer receiving the dividend is generally entitled to deduct the amount of tax paid abroad from the amount of tax calculated on the sum of the taxpayer’s income earned both in Poland and abroad. The amount of the deduction cannot exceed that part of the tax calculated before the deduction that is proportionally attributable to the income earned in the foreign country.
The situation becomes more complicated in the case of a family foundation, because it benefits from a subjective exemption and is generally not subject to taxation.
In the case of a family foundation, it can be concluded that taxation of its income will generally occur in two situations:
– generating income from the rental of assets used for conducting business activities by the founder, beneficiary or an entity associated with the family foundation, founder or beneficiary (taxed at 19% CIT);
– in the case of income from so-called prohibited activities (taxed at 25% CIT).
When determining the tax on the total income of a family foundation, the possibility of deducting 19% tax on the lease of the family foundation’s assets to a related entity should also be taken into account, from the tax calculated at the rate of 15%.
The family foundation will be entitled to deduct the foreign tax withheld in connection with the payment of dividends, from the amount of tax due from the family foundation, and calculated at the rate of 25% and 19% (unless the tax calculated at the rate of 19% was deducted from the tax due on benefits paid to beneficiaries).
The family foundation should also determine the proportion of the deduction of foreign tax, and this should correspond to the share of the foundation’s foreign income in its total income.
When analysing the possibility of deducting foreign tax from a dividend paid to a family foundation, the provisions of the relevant double taxation treaty (concluded by Poland with the country in which the entity paying the dividend is headquartered) and the provisions of the international MLI convention, if it has been ratified by both countries, should be taken into account.
It follows from the above that, in principle, deducting tax paid by a foreign entity paying a dividend to a Polish family foundation is possible, but the method of its recovery (deduction) is not intuitive and requires knowledge and experience in the field of Polish and international tax law.
Are companies paying dividends to the Russian Federation exempt from the obligation to collect flat-rate income tax?
Currently, the provisions of the CIT Act do not contain a regulation that would directly exempt the payer of the dividend from the obligation to collect tax in the event that the recipient of the dividend is a family foundation.
In accordance with the general tax provision (Article 26, paragraph 1 of the CIT Act), legal persons that make payments of dividend receivables act as payers and are obliged to collect flat-rate income tax on the day of its payment.
Does this mean that despite the exemption of the family foundation from CIT, capital companies paying dividends to it are obliged to collect tax?
In our opinion, when analysing the justification for applying these provisions, the systemic interpretation and the subjective exemption from income tax granted to the family foundation should be taken into account. The income of a family foundation from dividends paid by commercial companies is, after all, exempt from CIT. Therefore, in order to benefit from the exemption to which the foundation is entitled, it would be forced to apply for a refund of overpaid tax each time.
It seems that adopting such a solution would be contrary to the intention of the legislator, who introduced a subjective exemption of a family foundation from CIT in order to facilitate the accumulation of property and its management in the interests of beneficiaries. Assuming the rationality of the legislator, since the legislator exempted the family foundation from the obligation to pay income tax, there is no basis for the payer to collect tax contrary to the applicable exemption.
We therefore believe that capital companies should not collect tax on dividends paid to family foundations. Nevertheless, due to the lack of regulations that would directly regulate this issue, it is worth considering filing an application for a tax interpretation that would confirm the above position. The tax office has already started to respond positively to individual inquiries from taxpayers (e.g. Letter of March 4, 2024, Director of the National Tax Information 0114-KDIP2-1.4010.690.2023.1.MW), so the risk of receiving a negative answer is not high, but to protect yourself against a change in position, it is worth taking care of such protection.