Foundations have existed in Polish law for quite a long time, but they have been of limited use – for public interests. It is not currently possible to set up a foundation for private interests. The Polish legal system does not have any effective tools allowing to plan the multigenerational succession of a family business. This situation is expected to change with the introduction of the Family Foundation Act which is anticipated to become law in early 2022.
What alternatives have been used until now?
Due to the poor offer of legal solutions allowing to plan for continuity and indivisibility of family businesses, succession planning had to be achieved through alternative solutions.
Under the Polish legal system, family businesses would most often be transferred via the following routes:
- Inheritance (by a group of individuals inheriting “by law” or individuals named in a last will and testament)
- Donations or sales
- The creation of a web of interconnected companies.
Each of the above listed methods has at least one drawback – its short-term impact on the fate of the family business. The fact there is not one single institution allowing to fully consolidate the will of the testator, has meant that individual solutions and unconventional succession mechanisms had to be created on a case-by-case basis.Instead of creating complex (and costly) holding structures or dedicated closed-end investment funds, capital has often been accumulated in private foundations or trusts managed in Austria, the Netherlands, Liechtenstein, Malta, Germany, Switzerland, Sweden and more recently Hungary.
What is a family foundation?
The concept which has been operating successfully in numerous countries for years, is to preserve family wealth in accordance with the last will and testament of the foundation’s founder. A well-planned succession through a family foundation allows to solidify and unify the goals of a family business and in consequence to define them not just for the next generation but for the long term. In this respect a long-term strategy is absolutely crucial. Until now however, no adequate tools were available to implement such plans. This will now be finally possible, thanks to the inception of a family foundation.
How does it work? Some basic information about family foundations:
- The key functions of the family foundation are to manage and safeguard assets and to provide services to the beneficiaries named by the founder of the foundation.
- To minimise the risk of fragmentation of assets or loss of control over a portion of assets. Family conflicts, the sale of shares to third parties or the fragmentation of shareholding – are just some of the matters that may need to be navigated and mitigated.
- To play the role of passive investor. The foundation owns the assets transferred to it. It brings together a group of interconnected entities and enables efficient management.
- Inability to do carry out business activities. The primary objective remains to safeguard assets. Although typically considered an integral part of business, economic risk is completely removed.
Who is a family foundation for?
Provided their plan is to hand the company over to the next generation, every entrepreneur should consider establishing a family foundation, regardless of the scale of their business.
Flexibility is the main advantage of this solution. The foundation’s founder has the ability to shape the responsibilities and powers of their family members, in accordance with their plans and vision. That way a brand developed over many years cannot be misappropriated.
How to create a family foundation? It takes five steps to create a family foundation:
- Create a foundation statute with plans for succession and successors (their role in the future management of assets and the benefits obtained from the foundation);
- Submit the founder’s declaration on the creation of the foundation – this is done through a founding act drawn up by a notary (for a foundation set up during the founder’s lifetime) or a last will and testament (in the case of a foundation established after the founder’s death);
- Establish the family foundation bodies as required by law or statute;
- Bring assets into the foundation – of a value of not less that PLN 100,000;
- Register with the register of family foundations – at this point the foundation becomes a legal entity.
How much does a family foundation cost?
A family foundation must be registered with the register of family foundations of the National Court Register which carries a fee of PLN 500.
In the event changes that need to be reflected in the register are made to the family foundation, an application fee of PLN 250 is payable.
The draft legislation does not address changes to the cost of drawing up the document of incorporation in the form of a notarial deed. Presumably this will depend on the value of assets transferred into the family foundation, as is currently the case with ‘regular’ foundations. When transferring the minimum amount of assets into the family foundation the notary tax shall not exceed PLN 2,610 (i.e. PLN 1,010 + 0.4% on amounts over PLN 60,000). In the event the assets transferred exceed PLN 100,000 in value, the level of notary tax is determined through the following rules:
- for amounts over PLN 60,000 up to PLN 1,000,000 – PLN 1,010.00 + 0.4% of amounts over PLN 60,000;
- for amounts over PLN 1,000,000 up to PLN 2,000,000 – PLN 4,770 + 0.2% of amounts over PLN 1,000,000;
- for amounts over PLN 2,000,000 – PLN 6,770 + 0.25% of amounts over PLN 2,000,000, but capped at PLN 10,000. However, in the case of transactions carried out between persons included in the first tax group as defined by the 28 July 1983 Act on inheritance and donations tax the tax must not exceed the cap of PLN 7,500.
It is worth bearing in mind that some costs can be managed. Many notaries will contractually agree to fixed fees during negotiations. Such discussions should be held before you chose a law firm to support you through the process of creating a Foundation. Additionally, a proportion of the assets can be donated to the Foundation, which is a very efficient way to deal with the notary tax.
How does a family foundation work?
Any natural person can be a founder. The draft legislation allows a foundation to have several founders (however this option is not available in the event of a family foundation established through a last will and testament, which can only be drawn up by a single person).
Neither the founder nor the beneficiaries receive share rights as a result of a foundation being created. It remains a separate structure with its own assets and legal personality. More importantly, the founder is not responsible for the foundation’s obligations.
The key component in the effective implementation of the founder’s plans is the creation of a statute. It is the main pillar defining the most important operating principles of the entity (i.e. the beneficiaries; the rules surrounding the use of the foundation’s assets; the powers and responsibilities of the persons managing the foundation and how it is represented). The founder has wide-ranging freedoms in defining the rules of operation and management of the family foundation. A statute is a document which, outside of the required elements indicated in the Act, represents the founder’s vision.
The shape of the entity (the wording of the statute) is determined by the founder. It may be subject to changes and addenda during the founder’s lifetime (the founder carries out the changes him/herself) or after their death. In the latter scenario the changes would be carried out according to a set of conditions and in line with implementation instructions (as set out by the founder) after their death.
What is the structure of a family foundation? The structure of the family foundation resembles that of a company. Within there will be a(n):
- Board – which represents the foundation and carries out its affairs. It is responsible for both, achieving the foundation’s objectives and its finances.
- Board of protectors – which carries out supervisory functions. This is an optional body.
- Group of beneficiaries – which is made of beneficiaries, who have been granted the right to participate in the assembly. The group’s role is to adopt resolutions on matters referred to in the relevant legislation or the statute of the foundation.
Beneficiaries of a family foundation
The beneficiaries of a family foundationare natural persons – regardless of whether they are a founder’s next of kin or not and public benefit organisations. The beneficiary of a foundation is not a “partner” within the foundation nor are they a co-owner of its assets. The beneficiary’s privileges are set out by the founder. The founder may provide the beneficiary privileges to carry out some services or they may allow the beneficiary to take over some of the foundation’s assets upon liquidation.
Family foundation and tax
According to the draft legislation the basic tax principles for foundations are as follows:
- Bringing assets into the foundation. The transfer of relevant assets into a family foundation, allowing it to fulfil its aims, is not subject to corporation tax, provided that the founder is the transferor. In real life terms, this may mean that assets received by a family foundation from other persons, e.g. as a donation, will be taxed through the foundation.
- Generating income during its lifespan. The operating activities of a family foundation will be subject to corporation tax at the general rate of 19%.Unfortunately, the bill does not propose to implement the reduced rate of 9%. Furthermore, the introduction of income tax on dividends on companies whose shares or stocks the Foundation owns has to be viewed as a negative development.
- Beneficiaries’ benefits. Contributions from a foundation’s assets made to its beneficiaries as allowances or as a result of the liquidation of the foundation will be subject to inheritance and gift tax. Payment made to the privileged group of beneficiaries (which includes: the spouse, the descendants, the dependents, the step-children, the siblings, the stepfather, the stepmother and the founder) will be exempt if the contribution comes from the assets brought into the foundation by the founder. By way of example, if the founder brings in PLN 100,000 to the foundation, the exemption applies only to this amount. The remaining beneficiaries of contributions from a family foundation and assets of a liquidated foundation will pay tax at the new rate of 19%.
Concerns over the way in which family foundations are taxed according to the draft legislation law has already been highlighted. The key demand is to ensure the fiscal neutrality of the newly introduced entity.
Family foundation succession
Those who plan their succession truly face a challenge. Emotions and uncertainty are an integral part of this undertaking. It is difficult to choose one’s successors and the optimal tools that will ultimately enable the transfer of the business as well as its further expansion. If used in the correct way however, the new institution and the flexibility it provides will allow for the allocation of roles in good time, and prudent planning with appropriate support will result in achieving the selected aims.
The Polish approach to family foundations will compete with both their overseas counterparts, as well as the existing solutions developed and applied prior to the new law coming into force. Unfortunately this attempt to encourage Polish entrepreneurs to keep their assets within the Polish territory collides with the overly assertive attitude of lawmakers and their fears that foundations could be used for tax avoidance.
Following consultations and hearing the many concerns raised, the Ministry of Finance has not ruled out changes to the law to ensure family foundations remain an attractive proposition. Considerations are being made to add to the draft legislation, some of the potential provisions are:
- The introduction of a repolonisation (repatriation) relief – for capital transferred from assets accumulated in foreign entities into a Polish family foundation;
- The possibility of the founder of a family foundation to be a named beneficiary;
- Changes to the inheritance and gift tax for beneficiaries of a family foundation, based on their eligibility under the 28 July 1983 Act on inheritance and gift tax. A change to the basic tax rate of 19% at which beneficiaries are currently taxed is being considered. In its place a three-tier system could be introduced: 7% for the first tier, 12% for the second and 20% for the third;
- The ability to carry out limited business activities and to generate passive income (e.g. rental or lease income) – by introducing a list of permitted activities for family foundations;
- The option of registering for VAT;
- Making the 9% CIT tax rate available;
- The introduction of dividend tax deferral until dividends are paid out to the beneficiaries of the foundation.
Works on the bill are coming to an end, and it is currently envisaged that it will be possible to create family foundations as soon as in early 2022. This publication looks at the general framework for a solution, soon we will find out what its final shape will be. Only then will it be possible to assess this proposed and ultimately essential idea.