As announced in last week's article, it's time for our final post on family foundations. Today, we'd like to discuss the tax issues associated with running a family foundation.
The Act provides for many aspects encouraging the creation of such foundations, including tax relief.
Beneficiaries
It is crucial to introduce an exemption from inheritance and gift tax for the acquisition by individuals who are beneficiaries, including founders, of ownership of assets or property rights that are the subject of benefits received from a family foundation, as well as those constituting property received in connection with its dissolution. This exclusion will apply if the acquisition is based on a title specified in the Inheritance and Gift Tax Act. The acquisition by individuals of benefits and property from a family foundation in connection with the dissolution of the family foundation will be subject to personal income tax, at a rate depending on the beneficiary's relationship to the founder.
Complete personal income tax exemption will apply to the founder and close relatives belonging to the so-called "zero group" in relation to the founder, as defined in the Inheritance and Gift Tax Act. These include: spouse, descendant, ascendant, stepchild, sibling, stepfather, and stepmother. Individuals not included in this group will be subject to the 15% rate.
It should be noted that only the part of the benefit or property acquired by the founder or a person belonging to the "zero group" in relation to the founder will be exempt from personal income tax - this is the part corresponding to the current proportion appropriate for that founder as included in the list of assets.
Family Foundation
The family foundation, in turn, will be subject to the 15% income tax introduced in the Corporate Income Tax Act on benefits and property transferred or made available by the family foundation, directly or indirectly, in connection with the dissolution of the family foundation. Adopting this rate does not render the new income tax rules excessively favorable, which could result in the institution of the family foundation being exploited for potential optimization mechanisms.
The taxation of a family foundation and its beneficiaries will not differ significantly from the taxation of income and other property gains if the family foundation had not been established. The family foundation will not benefit from any extraordinary tax preferences unavailable to entities in a similar situation. The exemption in the Personal Income Tax Act is also not unusual, as it is modeled on the existing exemption for individuals in the so-called "zero group" referred to in the Inheritance and Gift Tax Act.
In terms of VAT, the tax consequences of transactions and events occurring in connection with the introduction of a family foundation into the legal system will be determined in specific factual circumstances based on existing national VAT regulations, taking into account the regulations arising from the VAT Directive and other EU regulations. The Family Foundation Act does not introduce any changes in this regard.
Moving on to the last point, you probably remember that, as we mentioned in our first article on this topic, the foundation will only be able to conduct its activities in a few specific areas, which we described there. For those of you who haven't had the opportunity to read that post, we've included a link below:
Family Foundation | Graś and Partners
In the final stage of the legislative process, a penalty was added for family foundations conducting business activities outside this scope. The law provides for a 25% income tax rate for such activities, compared to the "standard" corporate income tax rate of 19%.
This post concludes our series on family foundations. The agenda for the 56th Senate Session, which begins today, includes the Family Foundation Act as one of its agenda items. Therefore, we are getting closer to the moment when the Family Foundation Act will come into force. In summary, it should be recognized that a family foundation should help secure family assets and build relationships with potential successors, while also protecting the interests of a business that has been running for many years.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of January 11, 2022
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