The family foundation: what it is and who should take an interest in it

In this article we describe the most important rules governing how this new type of entity operates and answer some questions about the family foundation.

What is a family foundation?

A family foundation is an entity that operates under the Act of 26 January 2023 on Family Foundations (the "Family Foundation Act").

It is modeled on similar entities that operate in other countries (for example in Switzerland and Austria).

Pursuant to Article 2(1) of the Family Foundation Act: "A family foundation is a legal person established for the purpose of accumulating assets, managing them in the interest of beneficiaries, and providing benefits to beneficiaries.

The founder sets out the detailed purpose of the family foundation in its statute." The purpose of a family foundation is therefore to hold and accumulate assets and then to invest them and distribute them to designated persons.

A family foundation may be established for a fixed term or for an indefinite term.

A family foundation has legal personality, which means that it is a separate entity and can independently acquire rights and incur obligations.

In particular, a family foundation may own assets contributed to it or acquired by the family foundation itself, such as shares in companies or real estate.

Within a family foundation we can distinguish two main categories of persons: the Founder, the person who establishes the foundation, contributes assets to it, and grants it a statute setting out the rules for managing the foundation's assets; and the Beneficiary, the person who, in accordance with the foundation's statute, is entitled to receive benefits from the family foundation.

The beneficiaries of a family foundation may be, for example, members of the founder's immediate family, although the founder may also be a beneficiary.

The mandatory bodies of a family foundation are the management board, which represents the family foundation and conducts its affairs, and the assembly of beneficiaries, which, among other things, approves the foundation's financial statements and discharges the members of its management board.

A family foundation may also have a supervisory board, which performs supervisory functions over the management board.

What are the most important features of a family foundation?

The founder enjoys a wide degree of freedom in determining how the family foundation's assets are managed, as the legislator has not imposed any restrictions in this respect.

To this end, the founder may, for example, include appropriate provisions in the family foundation's statute concerning the conditions that must be met for a given benefit to be paid out by the family foundation.

It is therefore an instrument that allows the founder to manage family assets effectively, in line with their needs and expectations.

The founder may, for example, define the scope of permissible investments by the family foundation, or make the foundation's ability to carry out a given action conditional on obtaining the supervisory board's consent.

Moreover, a family foundation makes it possible to protect family assets in the future, even after the founder's death.

Establishing one can structure and simplify matters related to succession after the founder.

According to the position of the Ministry of Finance: "[A family foundation] acts as a family treasury.

It is intended to provide the family with financial resources while also fulfilling the founder's vision and upholding the values they have adopted in business." In addition, a family foundation does not pay income tax at the moment it earns income from "permitted" business activity (discussed in more detail below).

Therefore, if a family foundation reinvests its assets (for example, sells the shares it holds and uses the proceeds from the sale to acquire further shares in other companies), it will not have to pay income tax on the income earned from the sale of such assets.

Income tax will be due only when the family foundation makes a payment to its beneficiaries.

What can and what cannot a family foundation do?

Pursuant to Article 5(1) of the Family Foundation Act, a family foundation may carry out business activity, among other things, in the following areas: disposing of assets, provided that such assets were not acquired solely for the purpose of further disposal; renting, leasing, or making assets available for use on another basis; acquiring and disposing of securities, derivatives, and rights of a similar nature; or granting loans to: capital companies in which the family foundation holds shares or stock, partnerships in which the family foundation participates as a partner, and beneficiaries.

By design, a family foundation is not an entity that should conduct active business activity, such as trading or manufacturing.

The legislator took the view that a family foundation should, as a rule, be a passive investor, conducting business activity only by way of exception in strictly defined areas.

It can be expected that the scope of permitted activity of a family foundation will become a subject of disputes between the tax authorities and taxpayers.

The family foundation in questions and answers. Does contributing assets to a family foundation entail an obligation to pay tax?

No, the provisions of the Personal Income Tax Act do not impose taxation on the contribution of assets to a family foundation.

This is confirmed by the practice of the tax authorities.

After certain assets have been contributed to a family foundation, is it possible to "withdraw" them back to the founder?

Yes, however this will be a transaction subject to income tax.

Do the provisions set a minimum value for assets contributed to a family foundation?

Yes, the minimum value of assets that must be contributed to a family foundation is PLN 100,000.

Can a family foundation be dissolved?

Yes, the provisions of the Family Foundation Act provide for this possibility.

A family foundation may be dissolved, for example, by a resolution of the foundation's management board, which can be adopted in cases specified by law.

Who is a family foundation for?

A family foundation is an interesting solution that should be considered in particular by people who run family businesses and people who hold significant assets.

The features and scope of activity of a family foundation can be very attractive to such people.

A family foundation may indeed prove to be an instrument that allows such people to pass their assets and/or the running of their business on to their heirs.

If you are planning to establish a family foundation or simply want to learn more about it, get in touch with us!

We will answer any questions and point you to specific solutions!

Author: Jarosław Józefowski. Have a question?

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