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Family foundation: property
Family foundations are becoming more popular as a way to manage assets and provide succession across generations. Before establishing a family foundation, however, understand the tax consequences of transferring property into and out of it. This article describes taxes associated with a foundation's property rental and sale, along with the risks and benefits.
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Is property rental taxed?
In principle, a foundation's rental of property is a “permitted” activity and is therefore not subject to tax. However, if its assets include property whose combined initial value exceeds PLN 10 million and it rents them out, it must pay an additional tax (the so-called minimum tax on buildings). Under the CIT Act this is 0.035% of property value monthly, charged only on the amount above PLN 10 million. The family foundation cannot deduct this tax, except against tax on prohibited activities charged at 25%.
For example, assume a foundation rents properties worth PLN 11 million in total. Its CIT liability is calculated as follows:
PLN 11,000,000 - PLN 10,000,000 = PLN 1,000,000 * 0.035% = PLN 350/month on the excess million
There is a crucial difference between a limited liability company or other commercial company and a family foundation when settling this tax. A company may deduct CIT paid on value above PLN 10 million as tax relief. A foundation cannot, unless it also conducts prohibited activity as discussed in individual ruling 0111-KDIB1-2.4010.3.2024.1.MK.
Transfer to a founder or beneficiary of property previously given to a family foundation by the founder as a gift or initial endowment
Transferring ownership of property from a family foundation to a founder triggers taxation of its entire market value, without deducting the original purchase price.
For example, in the situation described in point 6 above, tax on PLN 800,000 would be PLN 120,000 (PLN 800,000 * 15% CIT).
This deserves careful consideration before transferring assets to a family foundation, as the tax consequences may be significant and require substantial funds.
Can a foundation rent property to related entities?
First define related entities. For tax purposes, the CIT Act's provisions defining related entities are decisive.
The definition is found in Article 11a(1)(4) of the CIT Act.
Entities where one exercises significant influence over at least one other entity.
Entities significantly influenced by the same other entity, or by a spouse, relative or relative by marriage up to the second degree of an individual significantly influencing at least one entity.
A partnership without legal personality and its partner, or:
A company referred to in Article 1(3)(1) and its general partner;
A company referred to in Article 1(3)(1a) and its partner;
A taxpayer and its foreign establishment, or, for a tax capital group, a member capital company and its foreign establishment.
Article 11a(2) of the CIT Act gives the full definition of significant influence. It is broad, extending even to an individual's actual ability to shape an entity's key business decisions, such as in a capital company, without holding a management position or shares.
Having identified related entities, consider the tax treatment of a foundation renting property to them.
A family foundation's income from renting property to related entities is subject to CIT at 19% of revenue earned. The foundation can fully deduct CIT paid from CIT on benefits paid to its founder and beneficiaries, provided the earlier tax has not become time-barred. With regular payments, if 15% CIT equals the tax previously paid on rentals, the operation can be tax-neutral in effect.
Sale of property previously contributed to a family foundation and distribution of all proceeds to its founder or beneficiaries: is it possible, what are the consequences, and on what amount is tax calculated?
Property trading is generally not permitted and should be subject to a punitive 25% tax on income. But if a sale is incidental and not the object of the business, additional taxation may be avoided. For example, when a foundation buys property, rents it for some time and sells it, the transaction is not subject to the punitive rate if this is not a recurring business model. Whether the foundation bought the property itself or received property privately purchased and contributed to it, the sale is not subject to CIT. Tax arises when sale proceeds are paid out during the foundation's existence. In this case, the founder's property purchase costs cannot be deducted. CIT of 15% is charged on the entire amount paid to beneficiaries or the founder, without reducing the taxable amount by the acquisition price.
If the same example is considered during dissolution, the outcome is considerably more favourable. The foundation may then reduce revenue from the property sale by the founder's acquisition costs (tax value). The remainder is subject to 15% CIT.
If you found this article interesting, explore our tax advisory services and read how we can help you:
Summary
Managing property through a family foundation involves numerous complex tax issues requiring careful analysis. Each transaction, whether rental, sale or transfer, may have significant tax consequences. Discuss your plans with an expert to avoid unexpected tax burdens and optimise asset management.
If you need support in managing a family foundation, contact our Tax Coach specialists today to arrange a consultation and learn how we can help manage your finances effectively.
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