End of public consultation. Opinion.
Over a million family businesses operating in Poland, which generate 18% of GDP, have been waiting for this moment. The Family Foundations Act is scheduled to enter into force on January 1, 2022. This will provide the assets of family foundations with special protection against division, divestiture, or hostile takeover. According to the bill's justification, the current legal framework limits the options for senior family businesses to transfer their businesses. In the absence of a successor or agreement between family members, owners often decide to sell the business, leading to the loss of its family character. According to the government, situations such as "children dividing their parents' assets, their descendants then dividing the assets further into smaller shares and pursuing their own plans, including those unrelated to the business, should be prevented." According to the bill, the family foundation's role will be to manage its assets, ensure their protection, and provide financial support to the beneficiary designated by the founder. The founder (a natural person with full legal capacity) will designate the foundation's beneficiaries, who may be natural persons and public benefit organizations.
A family foundation is established and acquires legal personality upon entry in the register of family foundations, as a result of the founder's declaration of establishment of a family foundation in the articles of association or in a notarial will. The foundation's name (brand) will be accompanied by the annotation "Family Foundation" or the abbreviation "FR." The foundation's affairs will be managed by a management board. The supervisory body will be a board of protectors. It is important to note that a family foundation will not be able to conduct business activities. Why was this solution chosen? There are two reasons: regardless of whether the partners are natural or legal persons, they are not considered entrepreneurs. More importantly, conducting business involves risk, which contradicts the primary purpose for which family foundations were established: to protect accumulated assets. So how will a family foundation be able to grow its assets? By investing in shares and stocks of other companies and securities. According to the draft law, the founder will be obligated to contribute operating capital worth at least PLN 100,000. The draft law provides legal protection for the founder's creditors by preventing the transfer of all assets to the foundation. In such a situation, the foundation will repay the founder's debts (up to the value of the contributed assets).
However, the most important aspect of the proposed tax solutions is the contribution of business assets to a family foundation. Contributions of business assets to a family foundation will not be taxed. Importantly, inheritance and gift tax will not apply to the foundation's benefits or assets after its liquidation, received by the founder and their immediate family (spouse, children, parents, siblings, stepchildren, stepfather, stepmother). However, other beneficiaries outside the family will pay a 19% tax. Corporate income tax (CIT) will only be charged to the foundation on its income, such as dividends from shares in companies or investment funds. However, regarding the percentage tax rate, foundations will not be entitled to the so-called small 9% CIT; they will be taxed according to general principles.
Family foundations are a new solution in the Polish legal system, although they are known and used outside our country.
Family foundation and company – differences
The fundamental difference is that the successors will not become partners in the foundation, nor will they be able to transfer their rights or transfer them to their successors. Therefore, if a given family does not wish to preserve the company for future generations and this is not their goal, and the successors would like to be able to cash in their share or leave the family business, then establishing a family foundation may not be the best solution at all – the idea behind a family foundation is multi-generational succession. A family foundation will not operate under the same principles as commercial companies – although there are certain similarities here as well (for example, the foundation's management board is responsible for managing and managing the company's assets, representing and managing its activities, the so-called board of protectors does not perform the supervisory function, and resolutions on matters specified in the family foundation's statute or legal regulations are to be adopted by the so-called meeting of beneficiaries). The beneficiaries of a family foundation may be natural persons indicated by the founder, i.e. close persons or members of his family, as well as a public benefit organisation.
Summary
As mentioned above, a family foundation can be established by a founding act or a will – a notarial deed is required. A special public register of family foundations will be established in the National Court Register (KRS), and the foundation itself will operate under a statute adopted by the founder – a notarial deed will also be required. The founder will be required to contribute assets worth at least PLN 100,000 to the foundation, which will be used to achieve its goals. Importantly, this will not constitute income within the meaning of corporate income tax regulations.
The establishment and liquidation of foundations are intended to be tax-neutral. The draft bill provides for the imposition of the PCC tax on contributions made to foundations, as well as the generation of no income from such transfers to the foundation. However, a family foundation will not be exempt from corporate income tax – despite this assumption appearing in the initial drafts of the bill. If a foundation holds shares or stocks in companies, it will receive income from dividends from family companies – and distributions from these companies will already be taxed (no dividend exemption). Therefore, taxation will occur at the time of dividend payment, not at the time of distribution to beneficiaries, which is not a favorable solution. The proposed solutions regarding the taxation of distributions to immediate family members who are beneficiaries are partially beneficial – this is to be done in accordance with the Inheritance and Gift Tax Act. As indicated above, income from the activities conducted by companies belonging to foundations will be taxed under similar rules to corporations. Taxation of beneficiaries' distributions will therefore be similar to that of company shareholders, with the understanding that taxation will occur at the stage of paying out the foundation's dividend, not at the stage of disbursing the funds to beneficiaries. Income retained by the foundation will be taxed regardless of its distribution to beneficiaries.
Another proposal raised during public consultations, in addition to the aforementioned "reversal" of the family foundation taxation model, also addressed the issue of heirs' entitlements to compulsory share. The bill under discussion would also introduce changes to inheritance law regarding compulsory share. Funds contributed to a family foundation would be treated as gifts to heirs or other individuals entitled to compulsory share. While this is intended to prevent disadvantages for those entitled to compulsory share, in practice it may lead to financial liquidity problems when pursuing claims for compulsory share. These concerns were raised during the consultations, but ultimately, the right to claim compulsory share from a family foundation was limited to the ability of the obligated party to request a deferral or installment payment, or, in exceptional cases, a reduction. It is also planned to reduce the compulsory share by any benefits received from the family foundation by the entitled party.
Despite some reservations, the overall proposal for family foundations should be viewed positively, as they should ensure the continuity and operation of multigenerational businesses. They can also provide a measure of security for family businesses by defining the rules for entrusting them with management. The bill is expected to be submitted to parliament in the second half of 2021, and the act itself would enter into force on January 1, 2022.
If you have any questions or would like to plan your succession, please contact attorney Natalia Serwińska ( n.serwinska@kglegal.pl ).
