Family Foundations in Poland – What Tax Benefits and Challenges Await Entrepreneurs?

They say that family is best appreciated only in photos, but is that really true? Well-known companies such as Rolex, Dr. Oetker, and Electrolux have successfully broken this stereotype, proving that family cooperation can bring immense success to a business. These companies have survived on the market for over a hundred years, thanks to effective management through family foundations. Since last year, the possibility of establishing such foundations in Poland has become available, and it is increasingly gaining attention. By May 2024, 980 family foundations had been registered in Poland.

What is a Family Foundation?

A family foundation is a legal entity created for the purpose of accumulating assets, managing them, and providing benefits to its beneficiaries. Its goal is to protect assets from fragmentation among the founder’s heirs, while simultaneously supporting the continuity of the business operations and their long-term growth.

Beneficiaries of a family foundation can be not only family members but also an unmarried partner, a family friend, or even a trusted employee. This list undoubtedly differs from the statutory heirs, which makes the concept quite appealing to many taxpayers.

A family foundation can conduct business activities but only within a limited scope, including:

• Selling property, provided it was not acquired for resale;

• Renting, leasing, or granting the use of property on other grounds;

• Participating in commercial companies, investment funds, cooperatives, and similar entities, either domestically or abroad;

• Providing loans to affiliated entities.

Tax Benefits of Family Foundations in Poland

A family foundation is subject to corporate income tax (CIT). However, its taxation model is more similar to the Estonian CIT, as it only pays income tax when distributing benefits to beneficiaries or transferring assets after the foundation is liquidated. In such cases, the foundation is required to pay CIT at a rate of 15%.

If the family foundation conducts business activities not specified by law (for example, operating a car dealership), it is taxed under general rules, with a CIT rate of 25%.

Contributing assets to fund the foundation is treated as a donation, so neither the founder nor the foundation is obligated to pay PIT. However, when calculating the forced heirship (zachowek) for the deceased founder, such assets must be included if contributed within 10 years before their death.

It is also important to note that the income of the founder and beneficiaries obtained from the family foundation is exempt from inheritance and donation tax. However, these benefits may be included in the forced heirship calculation if the beneficiaries are entitled to it.

When Should a Family Foundation Be Established?

Example 1

Mr. Artur, along with his sons, runs a business renting apartments. The annual income from this activity amounted to PLN 100,000, and the profit was distributed as a dividend to all partners. Mr. Artur is considering which tax structure would be the most beneficial for him.

• Classic CIT

The company, being a small taxpayer, could benefit from a preferential CIT rate of 9%.

In the case of a dividend, the company would have to pay:

• CIT of PLN 9,000 [100,000 PLN * 9%],

• PIT of PLN 17,290 [(100,000 PLN – 9,000 PLN) * 19%].

The total income tax burden would be PLN 26,290.

• Estonian CIT

In the case of a dividend, the company would be required to pay:

• CIT of PLN 10,000 [100,000 PLN * 10%],

• PIT of PLN 10,000 [100,000 PLN * 19% – 90% * 10,000 PLN].

The total tax burden would be PLN 20,000.

• Family Foundation

In the case of a dividend, the family foundation would be required to pay:

• CIT of PLN 15,000 [100,000 PLN * 15%].

Assuming the foundation’s beneficiaries belong to the “zero” group, the total tax burden would amount to PLN 15,000.

This example clearly shows that a family foundation would be the most tax-efficient structure for Mr. Artur’s business, serving both to protect and grow his family wealth.

Example 2

Mr. Henryk runs a chain of bakeries called “Promyk,” holds shares in a confectionery called “Beza,” and plans to open a new café. He is considering setting up a holding structure to manage these assets effectively.

In our opinion, Mr. Henryk should establish a family foundation to manage the mentioned assets. The foundation would only pay income tax when distributing profits to the beneficiaries, allowing it to reinvest profits from the companies without the immediate obligation to pay CIT.

Summary

The family foundation is a new legal institution with an as-yet undefined position in the market. However, it is already gaining significant interest from taxpayers, mainly due to its attractive taxation model, which sets it apart from previous solutions.

It is important to emphasize that tax optimization should not be the sole reason for establishing such entities. The foundation must truly operate in accordance with its intended purpose to avoid suspicion of being used for tax evasion. It is crucial for both the founder and the beneficiaries to fully understand how it works and make informed decisions. This is a difficult task, especially for those who lack the necessary knowledge and experience, so it is advisable to seek assistance from experienced experts to avoid future problems.