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Family foundation: what is it, is it worth setting up, and how is it accounted for?
Creating a family foundation is a way to manage family assets effectively. In the new Act of 26 January 2023, lawmakers stress that its principal purposes are accumulating assets, managing them and providing benefits to beneficiaries designated by the founder. The founder must clearly define the foundation's goals in its articles, ensuring clarity and purpose. Above all, it facilitates long-term financial planning, protects assets and supports future generations; in many cases it can also provide a favourable tax solution.
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Key terms relating to a family foundation's operation:
Initial endowment: the fund representing the starting capital with which the foundation begins operating.
The minimum initial endowment is PLN 100,000. In many cases, however, a substantially larger starting amount is needed to make the undertaking financially worthwhile. The whole matter requires a detailed interview and assessment of the prospective founder's individual needs.
External financing for a family foundation and taxation
If we finance a family foundation with a loan from the founder's private funds or related parties, all interest paid to them is subject to 15% CIT. Both the founder and beneficiaries may always make a tax-neutral gift to the foundation.
A foundation as a source of financing for subsidiaries
Financing subsidiaries through a family foundation is tax-neutral and creates no liability to the tax office if it is on market terms. Currently, market loan interest rates considered safe are WIBOR 3M plus a 2.2% margin. If another rate is customary in a sector, in special cases it may be recognised as market-based; document and demonstrate how the rate under the loan agreement was calculated.
How does a family foundation report and settle CIT annually?
A foundation should file an annual income tax return on form CIT-8FR, showing tax-exempt income and the base taxed at 15%. Income means revenue less direct costs and a proportional allocation of general costs. A family foundation also files CIT-8 with a CIT/F attachment if it conducts so-called prohibited activities.
Who can receive benefits from a foundation?
Benefits may be paid to beneficiaries previously named in the founding deed. It is suggested that beneficiaries be listed by groups so the possibility of payments is not blocked.
Why are a family foundation's articles needed? Does inheritance law apply?
The way succession takes place should be governed in the foundation's articles. Key operating matters such as:
Conditions for payments to beneficiaries,
Rules and rights for managing foundation assets,
Succession
and many other issues are set out there. When establishing a foundation, choose a professional law firm to guide you step by step through preparing this most important document.
Dividing a foundation with multiple founders
Unfortunately, there are currently no rules allowing a foundation established by two founders to be divided. Therefore, in most cases, establishing a foundation with one founder is recommended.
Ways to contribute capital to a foundation:
The initial endowment established upon opening the foundation may consist of contributed property (ownership of specified assets or other property rights), particularly:
Cash;
Non-cash assets:
Property;
Securities (for example, public company shares, bonds and ETFs), as legally defined in Article 3(1) of the Act of 29 July 2005 on Trading in Financial Instruments (Journal of Laws 2023, item 646);
Shares and stock of companies we manage;
Other property, such as goods, works of art or a business.
A gift: its tax value (the tax cost the donor would have recognised if selling the asset when contributing it) becomes a tax cost when the foundation is dissolved.
Keeping accounts for a family foundation (tax and accounting perspectives)
When deciding to establish a foundation, consider how its accounts will be kept and choose a reliable accounting partner. Foundation accounting differs from ordinary company accounting. All business transactions must be recorded appropriately for both tax and accounting purposes.
- For tax purposes, transactions are recorded at “acquisition cost”. Each asset should be recorded in the books at its purchase price, allowing, among other things, correct calculation of the annual CIT-8FR return and tax-exempt income.
- For accounting purposes, an asset is recorded at its market price on the day it is contributed to the foundation.
Accurate recording of transactions from both tax and accounting perspectives
This is essential for proper management of foundation accounts both day-to-day and upon possible dissolution. During dissolution, accurately establishing acquisition cost (tax value) is essential for valuing assets contributed as an initial endowment or as gifts. Errors in foundation accounting may later cause much greater problems and costs than in ordinary companies.
Benefits for beneficiaries and taxes when a foundation has one founder
Each time a foundation pays a benefit to a founder or beneficiary, it must pay 15% CIT. Additional PIT may also apply depending on who receives the benefit and the beneficiary's relationship to the founder. PIT treatment can be divided into:
- Benefits to the founder: no additional PIT;
- Benefits to beneficiaries in the zero group: exempt from PIT. This includes a spouse, descendants (children, grandchildren, great-grandchildren), ascendants (parents, grandparents, great-grandparents), siblings, stepchildren, stepmothers and stepfathers;
- Benefits to beneficiaries in the first and second tax groups relative to the founder: additional 10% PIT. These include parents-in-law, daughters-in-law, sons-in-law and more distant family such as aunts and uncles;
- Benefits to other beneficiaries: 15% PIT.
Is it worth establishing a foundation with two founders?
Consider the additional PIT on benefits, calculated in proportion to capital contributed. Given current taxes, a joint foundation seems unfavourable for tax purposes.
Protecting foundation assets
A family foundation effectively protects against bailiff attachment in the event of a founder's financial difficulties. Under current rules, a bailiff cannot seize the foundation's funds for the founder's debts, except for funds related to child-maintenance enforcement. Remember, however, that making a gift to the foundation does not protect property against a possible fraudulent conveyance claim if assets were deliberately depleted before creditors' claims were satisfied.
If you found this article interesting, explore our tax advisory services and read how we can help you:
Summary
A family foundation may or may not be a good solution: everything depends on the future founder's needs and purposes. It is worth considering if the aim is to accumulate, grow and distribute assets “for generations”, while adding protection. With sufficient capital, its legal and tax structure appears sensible and worthwhile. It should not be established solely for “tax optimisation” with a possible intention to close it later; this may be tax-inefficient and generate unnecessary costs. It will certainly be tax-efficient when the aim is to grow assets. Profits from permitted activities have no tax consequences, making them in many cases an effective way to invest accumulated funds. Capital can thus grow faster and pass down generations in accordance with the founder's wishes without further taxation. If in doubt, discuss the decision to establish a foundation with a tax adviser.
More information about family foundations:
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