I. Legal and economic background underlying the establishment of a family foundation.

As of June 1, 2022, a completely new institution (the family foundation), previously known primarily from the laws of other European countries, will enter the Polish legal system. The family foundation, which is expected to be registered in six months, will be an effective way to ensure the transfer of family businesses to the next generation. Because this process often requires complex and often heated family discussions, it is reasonable to consider using a family foundation for succession now and, therefore, begin discussions with your family on this topic.

As estimated by the legislator in the justification for the draft law on family foundations of October 15, 2021, there are nearly 830,000 family-owned businesses in Poland. These businesses generate a total annual budget revenue of PLN 322 billion, representing 18% of the country's GDP . Data from the Family Business Institute show that approximately 57% of family businesses plan to succeed within the next five years. However, only 8.1% of successors declare a desire to run the company founded by their parents *.

The most common problems that prevent succession in a family are a lack of communication within the family, the lack of a candidate or person willing to take on the challenge of running the business, or a family conflict arising in this context when more than one person seeks to be the legal successor in the company after the death of the senior.

It's important to emphasize that a family foundation will ensure the company's survival in the hands of the founder's heirs, not just the next generation. Furthermore, the upcoming family foundation provides significant flexibility and provides tax incentives to encourage entrepreneurs to relocate family foundations registered abroad to Poland.

Preparing the entire complicated process of registering a family foundation is a major challenge for both family members and the legal side, so you should take the necessary steps to register it now to be able to take advantage of its benefits when the act comes into force on June 1, 2021.

II. Succession of a family business – what does it involve?

To better understand the reasons behind the initiation of work on a family foundation act, it is necessary to first familiarize ourselves with the process of family business succession and the options Polish law has offered in this regard to date. Succession is a long and multi-stage process, not uniformly regulated by law, of transferring knowledge, management, and ownership of a family business. It is a way to protect the company from uncontrolled takeovers and is intended to avoid conflict between heirs. There is no universal formula for successful succession. Due to the lack of a uniform regulation for conducting efficient succession that would secure family businesses in family hands for years, work began on the creation of a family foundation act. Due to delays, the act is scheduled to enter into force not on January 1, 2022, as originally planned, but on June 1, 2022. Therefore, entrepreneurs heading family businesses have enough time to consider the need to use this legal leverage that would secure the retention of their business in the family, which is often the achievement of their entire lives, and sometimes of many family generations.

Under current law, senior family business owners have limited options for transferring their business. They can utilize the solutions provided for in the Civil Code and the Commercial Companies Code. Currently, business owners often choose to gift or bequeath their business to a chosen person or persons. However, this only ensures succession in the second generation. They have no influence on the future of the business and the assets it has accumulated.***

III. Family foundation – what is it?

A family foundation manages its assets and provides protection and benefits to the beneficiary, in particular by covering the beneficiary's maintenance or education costs or, in the case of a beneficiary who is a non-governmental organization conducting public benefit activities, by supporting the beneficiary's socially or economically beneficial goals. Its name may be freely chosen and includes the term "family foundation." Its registered office must be located in the territory of the Republic of Poland.

A family foundation acquires legal personality upon entry in the register. Family foundations are a common solution abroad, helping to protect a company in situations where the entrepreneur's descendants are unwilling or unable to manage it. A family foundation professionally manages the company and distributes business profits to the founder's descendants. Family foundations are very popular in Europe, having been operating in many countries for decades****.

Establishing a family foundation will not entail any negative tax consequences for the entrepreneur. Transfers of funds from the business managed by the foundation to its beneficiaries will be taxed in exactly the same way as if they were made personally by the founder of the foundation.

Contributions of property to a family foundation by the founder will not be taxed. The family foundation will be able to conduct business activities, for example, manage the assets contributed. In the case of dividends paid from the company to the foundation managing it, the tax will be the same as if the payments were made to the founder. Similarly, payments from the foundation to its beneficiaries will be treated the same as if they were made by the founder personally. If they are made to the founder's immediate family, there will be no tax at all. If the funds are received by the founder's distant relatives, the tax rate will be the same as if it were a donation made by the founder. As the Legislator states on its government website, "We want entrepreneurs to return to Poland with the funds they have transferred to family foundations established abroad. Specifically for them, we are offering a repolonization tax relief, i.e., a personal income tax exemption for funds transferred from a foreign foundation to a family foundation established in Poland."

IV. Functioning of the family foundation and its bodies.

A family foundation will be established by its founder, most often an individual; there can be more than one founder. Furthermore, a family foundation can be established through a will. The founder will contribute a founding capital of at least PLN 100,000 to the family foundation.

A family foundation will be established by a memorandum of association or a will, which must be in the form of a notarial deed. Additionally, it will be necessary for the founder to submit a declaration, establish the family foundation's governing bodies, contribute the founding capital, and register the family foundation in the appropriate register. The family foundation's management board will manage the family foundation's affairs and represent it externally. An additional, optional oversight body will be the board of trustees. The beneficiary assembly will consist of individuals authorized by the statute to participate. Decisions in this regard will rest with the founder. The beneficiary assembly is a subsidiary and supplementary body. Its task is to adopt resolutions only on specific matters, strictly defined in the act or statute, primarily to ensure the continuity of the family foundation's operations. Therefore, it should not be assigned the powers of a shareholders' meeting or a general meeting in companies.

V. Tax issues.

A family foundation will be subject to corporate income tax (CIT). This also applies to foundations within an organization.

VI. Summary.

The introduction of a new institution, the family foundation, will enable the multi-generational succession of businesses whose profits provide a livelihood for the founder's family and other close relatives, and will allow for the retention of ownership of assets in accordance with the founder's will. Furthermore, in line with the legislator's goal, family foundations will provide an opportunity to leave capital in the country.

This alert is for informational purposes only and does not constitute legal advice.

• Result of the study by the Family Business Institute "A family business is a brand" as part of the Family Business Statistics project. http://www.ibrpolska.pl/raporty/statystyka_firm_rodzinnych/ (accessed August 28, 2019).
  ** Result of the study by the Family Business Institute in 2017. A year earlier, this indicator was 6.3%. http://www.ibrpolska.pl/aktualnosci/przyszlosc-firm-rodzinnych-sukcesorzy-przed-trudna-decyzja-o-przejeciu-firmyrodzicow/ (accessed August 28, 2019).
  *** Justification for the draft act on family foundations of 15/10/2021, p. 3.
  **** https://www.podatki.gov.pl/polski-lad/pakiet-dla-biznesu-polski-lad/repatriacja-kapitalu-polski-lad/fundacje-rodzinne-polski-lad/