FAMILY FOUNDATION – SUCCESSION PLANNING
We present, in telegraphic summary, the rules for the operation of a family foundation according to the updated draft, taking into account the changes it will make to the tax and inheritance law already in force.
A draft law on family foundations is undergoing proceedings at the Government Legislation Centre. The project was submitted by the Minister of Economic Development, Labour and Technology in March 2021. After taking into account the postulates raised during the public consultation, a new draft law was presented in October 2021. It is currently at the opinion stage and the anticipated date of entry into force of the new legislation is June 2022.
In the current legal state, in the event of death of the owner of a family business, in order to ‘preserve’ its activity the heirs must demonstrate their will to continue the business, which in practice poses considerable problems. Firstly, there are not always legal successors, and even if there are, they are not always interested in taking over the business. Secondly, there are often several heirs, and the relations between them are often dissimilar, and thus it is also not conducive to efficient communication and decision-making. In the absence of a successor or in order to avoid conflict between heirs, owners of family businesses decide to sell the business. This obviously involves the loss of the family character of the business.
We wrote about the assumptions of the original bill in the article “Family Foundation in Poland – Essence of the idea vs. expectations of entrepreneurs“.
FAMILY FOUNDATION in markets with a tradition of generation business
In other jurisdictions, e.g. Switzerland or Liechtenstein, the institution of a family foundation has already been functioning for years, so we should be glad that finally in Poland actions are taken to introduce it into the legal order. This will definitely simplify intergenerational succession planning, allowing the progenitor of the business to establish his/her own rules for administering the family business and for distributing the assets. This means that upon the death of the founder (the founder of the foundation) the assets of such a foundation will not enter into the estate. The family foundation, as a legal entity, will manage and ensure the protection of its assets and provide benefits to a designated beneficiary.
Permissible activities of a family foundation
According to the draft, a family foundation will only be allowed to carry out business activities consisting in:
- the disposal of property of which it is the holder or owner (provided that the property was not acquired solely for the purpose of further disposal);
- hiring, leasing or otherwise providing access to property it owns or leases;
- joining and participating in commercial companies, investment funds, cooperatives and similar entities domiciled in Poland or abroad;
- acquiring and disposing of securities, derivative instruments and rights of a similar nature;
- granting loans to corporations and partnerships (in which it is a shareholder) and beneficiaries;
- trading in foreign means of payment belonging to the family foundation for the purpose of making payments related to the activities of the family foundation;
- operating a business as a farm.
Founder and assets of the family foundation
A family foundation may be created (established to function) by a founder. Whereas, any natural person with full legal capacity may become the founder. Translating this into non-lawyer’s language: every person over 18 years of age and not incapacitated. As a rule there can be several founders, with only one exception, when the foundation is established pursuant to the provisions of a will. In this case, obviously, the founder is only one person (the testator), expressing his/her will in the will.
The founder (or founders – depending on the number of founders) organise the so-called founding fund, i.e. funds (assets) allocated for the accomplishment of the foundation’s goals. In other words, they contribute to the creation of the assets (property) of the family foundation whose value cannot be lower than PLN 100,000.
In addition to the aforementioned initial fund and the profits earned in the course of the foundation’s activities, the assets of a family foundation also consist of donations from:
- the founder/s;
- heirs at law of the founder or the founder’s spouse, ascendants or descendants;
- trusts (legal agreements under which ownership or possession of assets is transferred to a trustee for the purpose of trust administration).
Importantly, the draft assumes that the liability of the family foundation will be limited precisely to the value of the property (funds) contributed by the founder/s.
Who can become a beneficiary of the foundation?
A beneficiary of the family foundation may be an individual or a non-governmental organisation carrying out public benefit activity. The founder prepares a list of the first beneficiaries of the foundation and the scope of their rights. After the establishment of the family foundation, the list of beneficiaries is updated by the management board. At any time, the founder is entitled to change the beneficiaries and the benefits or property to which they are entitled after the liquidation of the family foundation.
Statutory bodies of the family foundation – division of tasks
According to the draft, the bodies of the family foundation are to be:
a) Board of Directors;
b) Council of Protectors;
c) Assembly of Beneficiaries.
The Board would manage the family foundation’s affairs and represent it externally, be responsible for achieving the foundation’s goals and determining the current state of financial liquidity, as well as inform the beneficiary of the benefit to which he/she is entitled.
According to the proposed regulations, the funder may establish a council of protectors, but where there are more than 25 beneficiaries, the establishment of a Council of Protectors is mandatory. The Council of Protectors will be a body corresponding to the supervisory board in capital companies, performing control/supervisory functions in relation to the management board as regards compliance with the law and the provisions of the foundation’s statute.
The Assembly of Beneficiaries will be formed by those beneficiaries to whom the statutes grant the right to participate in it. The scope of competence of the Assembly of Beneficiaries seems to be relatively narrow (especially when compared with the competence of the assembly of shareholders of capital companies). Analysing the draft law, this body would have to adopt resolutions on:
- considering and approving the Board of Directors’ report on the activities of the family foundation and the financial statements of the family foundation for the previous financial year;
- granting the vote of approval to the members of the Board of Directors of the family foundation for the performance of their duties;
The statutes may of course also indicate other matters requiring resolutions of the Beneficiaries’ Assembly.
Auditing obligations
The family foundation will be subject to audit control. Within 3 months after the end of the financial year in question, an auditor/auditing team, appointed by the Beneficiaries’ Assembly, is to carry out a verification of the management of the family foundation’s assets, the incurring and fulfilment of obligations and public-law liabilities, in terms of correctness, reliability and compliance with the law, the objectives and the documents of the family foundation. Such an audit will result in a report being drawn up and submitted to the board of directors.
Register of family foundations
Foundations would be registered in an open register of family foundations kept by the District Court in Warsaw.
Revolution in taxation principles
According to the reasoning of the bill, the issue of taxing the activity of a family foundation is to take into account the whole cycle of its functioning from the moment of contributing the assets to the family foundation, through generating revenue (income) by the family foundation, up to the moment of providing services to the beneficiaries or liquidation of the family foundation. The assumption is therefore that the family foundation will combine the principles of taxation of holdings and tax-free succession of the assets of the immediate family.
The family foundation is to become a corporate taxpayer according to general principles. Assets contributed to the foundation by the founder for the pursuit of its objectives and the founding fund will not be subject to taxation. On the other hand, property contributed to the family foundation by a person other than the founder will be treated by the foundation as a donation subject to 19% CIT.
Additionally, the draft assumes introducing into the CIT act an exemption for revenue from capital gains and interest income of family foundations. The above is to make the rules of taxation of the payment of profits by family foundations to their beneficiaries equal to the rules of taxation of actual beneficiaries in holding companies. This will allow, inter alia, the reinvestment of dividend income and the postponement of its taxation until the final payment of the profit to the foundation’s beneficiaries.
What more? The introduction of the institution of a family foundation will also entail far-reaching changes in the inheritance and donation tax:
- All distributions from the family foundation to its beneficiaries and founder (including those derived from capital gains) will be subject to inheritance and donation tax, and the family foundation itself will act as the payer of this tax.
- Distributions from the foundation’s property contributed by the founder (as well as income from such property, e.g. income from the lease of real estate) will be subject to tax exemption for members of his/her closest family (similarly as it is currently the case with donations or inheritance in the so-called “zero” tax group).
- Distributions from property contributed by the founder to beneficiaries outside his/her immediate family are to be taxed according to the scale (at the currently applicable rates) but without taking into account tax-free amounts.
- The new 19% rate of inheritance and donation tax is to apply to distributions from capital gains made by the family foundation which are exempt from CIT on the foundation’s part.
In this way the taxation of the whole structure of the family foundation is to correspond to the rules applicable to holding companies.
The described taxation structure will be connected with the need for family foundations to keep special records, both accounting ones and those intended for the purpose of settlement of inheritance and donation tax. This will help to determine the following, necessary issues:
- what value of property was contributed by the founder;
- whether the income derived from this property is taxable at the time it is earned or whether it is exempt from tax;
- what category of income the funds transferred to the beneficiaries come from and what type of relationship links the beneficiary to the funder.
Certainly, the level of complexity of the accounts will increase when the foundation has several founders and different levels of relationship of the beneficiaries with each of them.
As a side note, it is worth mentioning about the rules of taxing the disposal of e.g. shares obtained by the beneficiary from the foundation. The beneficiary’s income obtained from the sale of shares received from the foundation (in the amount of the paid inheritance and donation tax) is exempt from income tax for the beneficiary.
Changes chase changes
The bill also provides for modifications of, inter alia, inheritance law regulations, the law on shaping the inheritance agricultural system, the law on counteracting money laundering and financing terrorism, as well as tax regulations.
For example, property transferred or donated to a family foundation is to be added to the inheritance when determining the basis for calculating the legitimate portion of the estate. At the same time, a possibility of deferring the date of payment or spreading it in instalments is also envisaged for a person obliged to pay the legitim. The draft also provides for introduction of the right to renounce the legitim.
Moreover, according to the draft, in the case of purchasing an agricultural real estate by a family foundation or a close relative of the founder – the consent of the General Director of the National Agricultural Support Centre will not be required, and the National Centre will not be entitled to submit a declaration on the purchase of the real estate. A beneficiary of the foundation who acquires such an agricultural property will also not be obliged to run a farm on the property.
It is also envisaged that the definition of trust and beneficial owner in the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act will be amended so that its provisions in the Act will also apply to a family foundation.
Summary
Undoubtedly, the proposed changes are a response to the needs of economic activity. It is precisely that in Polish law there is the lack of regulations identical to those in force in Western European countries, defining the functioning of institutions that enable effective planning of generational succession and preservation of continuity of family businesses. It is obvious that well-thought-out and thoroughly planned intergenerational succession, using the institution of a family foundation, will not only make it possible to set company goals and establish a plan for their realization by future generations, but first of all it will SAVE family assets and contribute to preserving the intangible values (spirit) of business. The draft law on family foundations described in the article envisages that the new legislation would take effect from 1 June 2022. In this case, therefore, we have been following the progress of the legislative procedure with interest.
Blog edited by dr Anna Maria Panasiuk
Founder and Managing Partner of Panasiuk & Partners, with many years of expertise in wealth management.
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