It seemed that with the President’s signature on the Polish Family Foundation Act we had reached the end of the legislative process and the long-awaited Polish family foundation had been enacted. It soon turned out that the work was resumed and the Sejm (Polish Parliament) was working on the final contents of the Act, but the entire amendment is set to be introduced on the day of the Act’s entry into force, i.e. on 22 May 2023.
The proposed amendments are expected to tighten the Act so as to prevent the use of the Polish family foundation as a tax optimization entity. The Act is aimed at family assets protection. Experts are positive about additional preferences, especially the ones regarding the use of a lower – 10% personal income tax for payments also for the beneficiaries from a slightly more extended family than originally planned, i.e. belonging to tax groups I and II under the Inheritance and Donation Tax Act. Let us take a closer look at the amendments.
THIRD TAX RATE FOR THE PAYMENT OF BENEFITS FROM THE POLISH FAMILY FOUNDATION TO THE BENEFICIARIES
The draft under consideration proposes the introduction of a third tax rate on the taxation of benefits from the Polish family foundation to the beneficiaries with personal income tax. The third rate of 10% would apply to the taxation of payments to persons belonging to the so-called first and second group of the founder under the Inheritance and Donation Tax Act. The first group is composed of: spouse, descendants (e.g. son, grandchildren, great-grandchildren), antecedents (e.g. mother, father, grandparents), stepson, son-in-law, daughter-in-law, siblings, stepfather, stepmother, in-laws. However, the Family Foundation Act has previously created the so-called zero group on the basis of one article of the Inheritance and Donation Tax Act and some of the persons from the first group belonged to it. This would result in considerable chaos when adopting the legislation in its current form. However, it can be assumed that the legislator wants to implement taxation of benefits on the basis of personal income tax, which would be as follows:
- PIT 0%: spouse, descendants, antecedents, stepson, siblings, stepfather and stepmother;
- PIT 10%: son-in-law, daughter-in-law and in-laws (the rest of the first group) and descendants of siblings, siblings of parents, descendants and spouses of stepchildren, spouses of siblings and siblings of spouses, spouses of the siblings of spouses, spouses of other descendants (the second group);
- PIT 15%: other people.
This change would increase the tax attractiveness of the payment of benefits for the founder’s family.
FINANCING COSTS FROM THE POLISH FAMILY FOUNDATION EXCLUDED FROM THE LIMITS OF THIN CAPITALIZATION
The draft also envisages introducing the exclusion of debt financing costs obtained from the Polish family foundation from the limit of debt financing costs. The amendment excludes the costs related to loans granted by the family foundation from the indicated limit. Consequently, entities taxed with corporate income tax who receive financing from a Polish family foundation will not be required to exclude costs incurred in connection with such financing from revenue acquisition costs.
INTRODUCTION OF THE POSSIBILITY OF COMBINING THE POLISH FAMILY FOUNDATION WITH THE ESTONIAN CIT
The draft also envisages introducing the possibility of combining a Polish family foundation with the Estonian CIT, therefore, it is proposed to make the Estonian CIT available to companies whose shareholders, stockholders or partners are natural persons being founders or beneficiaries of a Polish family foundation. At the same time, the family foundation will still not be allowed to be a shareholder in a company which uses the so-called Estonian CIT. However, it should be pointed out that this change also requires an amendment to the provisions on Estonian CIT, and this has yet to be implemented.
EXEMPTIONS OF THE POLISH FAMILY FOUNDATION FROM CORPORATE INCOME TAX
Another change is the introduction of a restriction on the exemption of the Polish family foundation from corporate income tax. In the original version of the regulations, the foundation was exempt from CIT in its entirety (with the exception of income from activities other than those indicated in the Act). The proposed modifications assume, however, that the exemption would not apply to income from rent, lease, and other agreements of a similar nature, if the subject matter of the contract is an enterprise, an organized part of an enterprise or assets serving to conduct business by a beneficiary, a founder or an entity affiliated with a Polish family foundation, the beneficiary or founder. An affiliated entity is understood as an entity holding 5% of shares or rights.
CLARIFICATION OF THE EXEMPTION OF THE POLISH FAMILY FOUNDATION IN THE STATE OF ORGANIZATION FROM CORPORATE INCOME TAX
The draft also clarifies issues related to the exemption of the Polish family foundation in the state of organization from corporate income tax. A Polish family foundation in the state of organization loses the right to exemption if it is not reported to the register of family foundations within six months from the date of its establishment. In this regard, in the case when a foundation has not duly notified the register and has conducted any economic activity within six months of its establishment, it is subject to taxation on a general basis. According to the draft, the family foundation in the state of organization will also lose the right to exemption from corporate income tax when the registry court legally refuses to register it, with the loss of the right to exemption occurring from the date of establishing the family foundation in the state of organization.
This change prevents the creation of a family foundation in the state of organization in order to carry out business operations exempt from taxation and disbursement of profits in the form of benefits, e.g. the so-called zero group, and further prevents failure to establish a foundation.
INTRODUCTION OF THE HIDDEN PROFIT CATEGORY
The draft also includes introducing the category of the so-called hidden profits to the Family Foundation Act, on principles similar to those of the Estonian CIT. Hidden profits would be taxed at a corporate income tax rate of 15%. The proposed list of activities considered to be a hidden profit is extensive and mainly concerns benefits, loans and other transactions made between the family foundation and the beneficiary, the founder and an entity affiliated with them, as well as the family foundation itself. Also in this case, the affiliated entity shall be defined by owning 5% of shares or rights.
The following shall be understood as hidden profits:
- costs of financing granted to the family foundation by the beneficiary, the founder or an entity related to them or to the family foundation,
- unpaid benefits which do not constitute benefits to the beneficiary within the meaning of the Family Foundation Act transferred to the beneficiary, the founder or an entity affiliated with them or a family foundation,
- benefits to a beneficiary, a founder or an entity affiliated with them or the family foundation for:
- services with the scope specific to services taxed with WHT for providing the following services: consultancy, accounting, market research, legal services, advertising services, management and control, data processing, recruitment and recruitment services, guarantees and sureties and similar services (this applies in particular to operations intended to resemble benefits, but which are not in fact such)
- fees and charges for the use or right to use proprietary copyrights, licenses, industrial property rights and know-how
- differences resulting from the statement of the market value of the transaction and the agreed transaction price in the case of a transaction made between a family foundation and a beneficiary, founder or entity related to them or a family foundation
- loans granted to a beneficiary in specific cases, where they are not reimbursed in a given year, despite the obligation and where the loan is granted for a period of more than 10 years or less than 10 years where the final term of the agreement is at least 10 years.
This change is introduced so that the foundation could not be used or so that the use of its institution contrary to the intentions of the legislator would be restricted. It limits the tax evasion of transactions and services under the guise of benefits.
The Polish family foundation is a new instrument in Polish law. There will certainly be further amendments. For example: the legislator has not specified the provisions on issues related to the subjective exclusion of a Polish family foundation from the Corporate Income Tax Act. This means that donations to the Polish family foundation, regardless of the person who makes them, will be exempt from tax, which in relation to Polish legislative practice and the practice of Polish tax authorities is surprising and certainly will not be maintained.
The amendments to the Act which are currently planned are very good and are supposed to enter into force on 22 May 2023, the same day as the Act itself. We monitor the process on an ongoing basis and will keep you informed of its progress and the next changes that one could expect.