Family Foundation - Taxes
Are benefits paid from foundations to funders who are spouses exempt from taxation?
Previous position of the Ministry of Finance (KIS)
In the individual interpretations of 30 April this year. (sign. 0112-KDIL2-1.4011.113.2024.2.JK and 0112-KDIL2-1.4011.114.2024.2.JK), the Head of the KIS indicated that if there were several funders from the circle of the closest family, the payment of benefits to a given founder will be exempt from tax (PIT) only proportionally (in proportion to what part of the property was contributed to the foundation by a given founder). In the interpretations in question, the Director of the KIS stated that:
‘Property contributed to a family foundation by way of donation or inheritance by the spouse, descendants, ascendants or siblings of a given founder may, pursuant to Article 28(2)(1) of the Family Foundation Act, be deemed to have been contributed by that founder only insofar as the spouse, descendants, ascendants or siblings of that founder are not at the same time the other founders of the family foundation’.
Accordingly, the benefit to the founders, according to the previous approach of the Director of the KIS, was only exempted from PIT on a pro rata basis. The last proportion shall be 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 inventory of property.
‘Indeed, it cannot be considered that, since the founders are related to each other to a degree that qualifies them as immediate family (Article 4a of the Inheritance and Gift Tax Act), for the purpose of determining the proportion of property for income tax purposes, each of the founders contributed 100%.’
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 the family foundation (other than cash) be valued for this purpose?
In this context, the provision of Article 19(1) of the Family Foundation Act, which reads: ‘(1) Whenever the Act refers to the value of property contributed to a family foundation or the property of a family foundation, it shall be understood to mean the market value of the components of the contributed property other than cash, determined as at the date of the contribution of the property, in accordance with the rules 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 against payment, whereas the contribution of assets to a family foundation is generally free of charge (e.g. to the founding fund or by way of a donation). Nevertheless, in the absence of other regulations in the CIT Act, in our opinion it is reasonable to refer to Article 14(2) of the CIT Act. Pursuant to this provision, the market value of property and property rights is determined on the basis of market prices applied in trading in property, rights, etc. Analysis of this provision leads to the conclusion that for the purpose of contributing an asset to FR, its market value should be determined for the purpose of sale.
Determination of the value of the asset contributed to the family foundation may be important 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 subsequent transfer of the asset to the foundation’s beneficiary (15% CIT is due on the value of such a benefit according to the prices as at the date of its realisation).
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. cars), such methods can be used. In other cases, especially for particularly valuable assets such as works of art or real estate, a valuation should be carried out by an appraiser.
Can a business be contributed to a family foundation and is it worthwhile?
A business run by the founder as a sole proprietorship can be contributed to a family foundation. However, it must be borne in mind that a family foundation can carry out business activities to a very limited extent (for more details, see the answer to the question: What can a family foundation do?). Therefore, in practice, such an arrangement will only make sense in relation to businesses engaged in property rental and leasing activities. If the founder’s company carries out various activities, including real estate, a previously organisationally and financially separate part related to the real estate activity (the so-called organised part of the company) can be contributed to the family foundation.
The effective taxation of rental income is 13.04 per cent in a family foundation, assuming that distributions are made to beneficiaries from the ‘0’ group of kinship with the founder (for more details, see the answer to the question: What is the effective taxation when the foundation has rental income?). This is therefore an advantageous solution for a funder with an estate business taxed at 19% flat tax. Importantly, the funder and beneficiaries do not pay social and health insurance (ZUS) contributions.
What are the tax consequences of contributing a business to a family foundation?
VAT
The donation of a business to a family foundation will be exempt from VAT under the general rule that the disposal of a business is not subject to VAT (Article 6(1) of the VAT Act).
The family foundation will not be required to adjust the input VAT if the fixed assets acquired through the donation of the business will be used exclusively for taxable activities. The VAT adjustment is made only if there is a change in the purpose of the acquired assets, e.g. to non-taxable or VAT-exempt activities.
PCC
The donation will be exempt from civil law transaction tax.
CIT
The receipt of assets by a family foundation does not give rise to a CIT liability. It does not matter whether this contribution is made by way of covering the founding fund or, e.g. at a later stage, in the form of a donation made either by the founder or by his ascendants or descendants.
Depreciation
The contribution of the entire business as a donation results in the family foundation not being able to take any depreciation deductions at all on the fixed assets contributed with the business.
What impact do the Transfer Pricing rules have on a family foundation and related parties?
Family members of a founder or beneficiary are treated as related parties under the tax legislation. In the family ‘business’, on the other hand, ‘special rates’ or ‘promotional prices’ are often applied to the immediate family members. For these reasons, it is important for those running a family foundation to set the remuneration at the market level and to be mindful of the provisions on mandatory documentation of related party transactions. Transfer pricing tax obligations will arise if the family foundation makes transactions with the founder’s family members and their companies and the annual value of these transactions exceeds the statutory thresholds, viz:
- PLN 10 million net – in the case of commodity and financial transactions or
- PLN 2 million net – in the case of service and other transactions.
These limits apply to transactions of one type, separately for the cost and revenue side. In accordance with the regulations, the thresholds are set for each transaction of a homogenous nature, regardless of the number of related parties with which the transaction is concluded.
How is the foreign income of a family foundation taxed?
When a Polish family foundation receives foreign passive income (e.g. dividends or interest or rental income from a foreign property), it may be effectively taxed withholding tax in other countries. If the foreign company’s country of residence (or the location of the real estate) imposes a withholding tax on the distributed income, Poland’s international double taxation treaties may be helpful. Most often, an international treaty reduces withholding tax, but does not eliminate it.
What should be taken into account when contributing foreign real estate to a family foundation?
The contribution of foreign real estate, or its subsequent sale, will not be taxed in Poland, but taxation abroad may arise.
For example, taxation may occur in the situation of the disposal of real estate assets in the country where the property is located. Here, the double taxation treaties between Poland and the country in which the real estate is located will have to be specifically analysed.
Development activities in a family foundation
Among, the permissible types of business activities that family foundations can conduct, there is no listed real estate development activity. Conducting this type of activity may therefore require the foundation to pay income tax calculated at an increased, punitive rate of 25%.
A possible course of action, on the other hand, seems to be the transfer of the land purchased by the family foundation to a newly established or already existing special purpose vehicle that conducts real estate development activities. The shares in such a company and any profits it generates, later paid out as dividends, should, in principle, remain tax-free for the foundation. It should be borne in mind, however, that the land used for such an activity cannot be acquired by the family foundation solely for the purpose of further disposal. Therefore, this type of arrangement should be implemented with special caution.
- Short-term rental and hotel activities in a family foundation
As in the case of real estate development activities, short-term rental and hotel activities are also not among the types of business activities permitted by the legislature that can be carried out by family foundations. Such activities are taxed at a punitive 25 percent income tax rate, according to the fiscal.
The Director of the National Fiscal Information presents a unified position, according to which the forms of short-term rental described in the facts or future events presented in the applications do not fall within the catalog of activities permitted, in light of Article 5(1)(2) of the Law on Family Foundations.
This is also the opinion of the Minister of Finance, who responded to the parliamentary interpellation on 23.09.2024 with letter No. DD6.054.5.2024. In this letter, the Ministry of Finance provided the following reasoning:
“… As indicated, the rationale for this position is the circumstance that short-term leases lack the characteristic features of a lease relationship, such as the conclusion of a written contract, the signing of a report of delivery and acceptance, the constancy of the entity to which the property is made available and the covering of longer time periods…”.
Tax advisors disagree with this position, and short-term rental issues will soon be increasingly considered by administrative courts.
Activities that involve the day-to-day maintenance of such properties (among other things: cleaning or servicing) have not been designated by the legislature as permissible for family foundations. Their paid rental or lease to an entity in the hotel industry, however, may already enjoy tax exemption.
In view of this, it seems that, in principle, it is possible for a foundation to acquire a townhouse, apartment building, vacation home or hotel building and subsequently make it available for rent or lease to an operator (special purpose vehicle) for a fee.
Are companies paying dividends to FRs exempt from collecting flat-rate income tax?
Currently, the provisions of the CIT Law do not contain a regulation that explicitly exempts the dividend payer from collecting tax when the recipient of the dividend is a family foundation.
According to a general tax regulation (Article 26(1) of the CIT Law), legal entities that make dividend payments act as a dividend payer and are obliged to collect lump-sum income tax on the date of payment.
Does this mean that despite the family foundation’s exemption from CIT, capital companies paying dividends to it are obliged to collect tax?
When analyzing the legitimacy of the application of these provisions, in our opinion, it is necessary to take into account the systemic interpretation and the subjective exemption from income tax granted to the family foundation. After all, the family foundation’s income from dividends paid by commercial companies is exempt from CIT. Thus, in order to take advantage of the exemption granted to the foundation, it would be, as it were, forced to apply for a refund of the overpaid tax each time.
It seems that adopting such a solution would contradict the intention of the legislator, who introduced the subjective exemption of family foundations 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 paying income tax there is no basis for the payer to collect tax contrary to the existing exemption.
Therefore, we believe that capital companies should not collect tax on dividends paid to family foundations. Nonetheless, in the absence of legislation that explicitly regulates this issue, it is worth considering requesting a tax interpretation that would confirm the above position. The Fiscal Office has already started responding positively to individual inquiries from taxpayers (e.g., Letter dated March 4, 2024 Director of National Tax Information 0114-KDIP2-1.4010.690.2023.1.MW), so the risk of receiving a negative answer is not high, but to safeguard against a change of position it is worth taking care of such security.
Can the FR deduct tax withheld on dividends abroad (in the source country)?
In Poland, if a dividend is paid to a family foundation as a CIT-exempt entity, the company paying the dividend does not have to withhold and pay to the tax office a lump sum tax on the dividend. This has been confirmed by the director of the National Tax Information in individual interpretations issued, such as that of 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 joining and participation of a family foundation in foreign commercial companies that are income taxpayers in other jurisdictions, including the receipt of dividends, falls within the scope of permitted activities of a family foundation and is not subject to taxation at the family foundation level.
However, it should be noted that the foreign company paying the dividend may be obliged, under local tax laws, to withhold tax at source on the dividend paid. In such a situation, the Polish family foundation receives the dividend less the tax due in the source country.
When a foreign subsidiary withholds tax at source on a dividend, the Polish taxpayer receiving the dividend is, in principle, entitled to deduct the amount of tax paid abroad from the amount of tax calculated on the sum of that taxpayer’s income earned both domestically and abroad. The amount of the deduction cannot exceed that part of the tax calculated before the deduction is made, which proportionally falls on the income earned in the foreign country.
The situation becomes more complicated in the case of a family foundation, since this one