Family Foundation in Poland: Advantages and Limitations

A family foundation is a legal structure that allows you to transfer assets, such as company shares and real estate, to a separate entity, provide for your family across generations and benefit from substantially lower taxation. This guide explains how it works, who may find it useful, what limits apply and how to plan distributions.

Who is a family foundation for?

If you own businesses or real estate and are thinking about how to manage succession for what you have built, a family foundation may be a solution for you.

Consider it if:

• you are concerned that your assets may be split among heirs
• none of your children wants to take over the business
• you want to decide who receives assets, in what amount and when
• you are looking for a way to obtain more favorable tax treatment for income from your assets

What is a family foundation?

A family foundation is a family treasury. If you own shares in companies or real estate, you transfer their ownership to a family foundation set up for that purpose. The foundation is a separate legal entity that manages the accumulated assets and the profits they generate.

What can it do for you?

1. Let you step back from active management. The foundation has a management board that looks after its assets, much like the board of a limited liability company or a joint-stock company.
2. Provide financial security for your family. In the foundation’s statute, you specify who receives funds, how much and in which circumstances. You can also be a beneficiary as the founder. Your family does not inherit the assets directly; it receives the profits generated by those assets.
3. Protect against fragmentation. The assets remain in one set of hands: those of the foundation.
4. Support continuity across generations. The foundation can operate over successive generations, which benefit from its ongoing activity and accumulated profits.
5. Offer tax benefits. Profits generated by the foundation are taxed significantly less than in standard structures.

Advantages of a family foundation

• The Family Foundation Act is a considered regulation that addresses a real succession problem for businesses established 25 to 35 years ago. Without family succession, the value they have built often ends up with foreign investors.
• The foundation’s statute offers considerable flexibility. You decide who receives funds, when and in what amount, and who qualifies as a beneficiary, meaning a person entitled to receive funds or use the foundation’s assets.
• The foundation protects assets from fragmentation and supports continuity of management.
• Taxation of foundation profits is more favorable than in traditional company structures. Details follow below.

Taxation of a family foundation

When a family foundation is NOT tax-efficient

A family foundation is a solution for people with substantial assets. It is not worth setting one up if your income is small.

Example: You own two rental properties and receive about PLN 5,000 a month, or PLN 60,000 a year. In that case, the flat-rate tax on rental income is more favorable: 8.5% up to PLN 100,000 a year. A family foundation would not offer a better tax result, and you would also have to cover its operating costs.

When a family foundation can be tax-efficient

If, for example, you own three tenement buildings with 10 apartments each and annual revenue of about PLN 900,000, hold company shares that generate, for example, PLN 300,000 a year in dividends, and plan to reinvest the funds, a family foundation can produce measurable savings.

How the taxation works, step by step

1. Reinvesting profits within the foundation: the foundation pays no tax. By comparison, a limited liability company pays 9% or 19% corporate income tax (CIT).
2. Foundation profits before distribution: the founder and beneficiaries do not pay income tax until the foundation distributes funds to them.
3. Distributions to beneficiaries: the foundation pays CIT at 15%. If a beneficiary belongs to the founder’s zero-rate tax group, as for gifts, such as a spouse, child, grandchild, parent, grandparent, sibling or stepchild, that person pays no personal income tax (PIT). The combined tax burden is only 15%.

By comparison, a dividend from a limited liability company is subject to 19% PIT after the company has already paid CIT, for example at 9%. The foundation avoids double taxation. The actual difference in the tax rate can reach a dozen or more percentage points.

PIT rates for beneficiaries outside the zero-rate group

Practical takeaway: When planning the foundation’s statute, decide who will be its founder. Consider whether one foundation with two founders or separate foundations would be preferable; this affects the PIT rate for beneficiaries.

Limitations of a family foundation

A family foundation has rules and limitations. They are not necessarily disadvantages, but features you should understand before making a decision.

Costs to include in your plans

• An audit every 4 years, carried out by a team comprising a statutory auditor, tax adviser and legal counsel or advocate. It can cost as much as a dozen or so thousand PLN. It is also a useful oversight mechanism.
• Management board remuneration: the founder may manage the foundation at first. In the longer term, a professional should take on the role, so budget for suitable remuneration.
• Accounting: the foundation must keep accounts, which creates additional costs.

Limited scope of business activity

A family foundation may conduct business activity only in the following areas:

1. Disposal of assets, unless they were acquired solely for resale.
2. Leasing, renting or making assets available for use on another legal basis.
3. Joining and participating in commercial companies, investment funds, cooperatives and similar domestic or foreign entities.
4. Acquiring and disposing of securities, derivatives and rights of a similar nature.
5. Making loans to:
   • capital companies in which the foundation holds shares or stock
   • partnerships in which the foundation participates as a partner
   • beneficiaries
6. Trading in foreign currencies belonging to the foundation to make payments related to its activity.
7. Producing processed plant and animal products other than through industrial processing, provided at least 50% of the product comes from the foundation’s own cultivation, breeding or rearing, excluding excise goods.
8. Conducting forest management.

The foundation may conduct the activities listed in items 7 and 8 only in connection with an agricultural holding it operates.

How to distribute funds from a family foundation

A family foundation is not a private wallet. It has legal personality and, regarding distributions, is more like a limited liability company. The foundation’s statute determines what amounts are distributed and when, so draft it carefully.

An example of distributions in practice

Suppose the founder is also a beneficiary. The founder contributes assets to the foundation, including company shares and real estate. The foundation manages those assets and reinvests the profits.

As long as the foundation reinvests income, it pays no tax.

The founder has included a monthly payment of PLN 15,000 in the statute:

• The foundation pays the founder PLN 15,000 each month.
• The foundation pays 15% CIT on that amount.
• The founder is in the zero-rate group and pays no PIT.
• There is no additional tax burden.

The founder has also set out distribution rules for the children:

• PLN 2,000 a month after a child enrolls in university.
• PLN 5,000 a month after the child turns 25.
• If the founder dies before the children turn 25, PLN 5,000 a month is paid immediately.

This is a simplified example. There are many ways to define distributions, but each must be planned in the foundation’s statute.

Next steps

If, after reading this article, you think a family foundation may suit you, the next step is to analyze your specific situation. Consider:

• who should be the founder, one person or two
• who will be a beneficiary and which tax group they belong to
• how to draft the foundation’s statute for distributions and management
• the actual operating costs of a foundation in your circumstances

Contact our law firm and we will help you through the process of setting up a family foundation.

Frequently asked questions

What exactly is a family foundation, and how does it work in practice?
A family foundation is a separate legal entity, a kind of “family treasury,” to which you transfer ownership of assets such as company shares, stock and real estate. The foundation manages those assets through its own management board, reinvests profits and distributes funds to beneficiaries under rules you set in the statute. The assets are therefore not inherited directly and are not fragmented; the family benefits from the profits generated over generations.

When is a family foundation tax-efficient, and when is it better not to establish one?
A family foundation can be tax-efficient if you have substantial assets that generate significant income, such as several rental properties or company shares that produce dividends, and you plan to reinvest the funds. It is not worth setting one up for modest income, such as PLN 5,000 a month from renting two properties, because the flat-rate rental tax, 8.5% up to PLN 100,000 a year, would be more favorable, and the foundation also has operating costs.

How are distributions from a family foundation taxed for the founder and beneficiaries?
As long as the foundation reinvests profits, it pays no tax. When it distributes funds, the foundation pays 15% CIT. A beneficiary in the zero-rate group, including a spouse, children, grandchildren, parents, siblings or stepchild, pays no PIT, so the combined burden is 15%. Beneficiaries in tax group I or II pay an additional 10% PIT, and other people pay 15% PIT.

What limitations and costs should you consider before setting up a family foundation?
Plan for a mandatory audit every 4 years, which can cost a dozen or so thousand PLN, management board remuneration and ongoing accounting costs. A foundation may conduct business activity only within a defined scope, including renting or leasing assets, participating in companies, trading in securities or lending to companies and beneficiaries. Going beyond that list may put the tax preferences at risk.

How should you set distribution rules in a family foundation’s statute?
You design the distribution rules in the foundation’s statute and decide who receives funds, in what amount and in which circumstances. For example, the founder may set a fixed monthly payment and specify conditional payments for children, such as PLN 2,000 a month after they start university and PLN 5,000 after they turn 25. Before setting these rules, decide who will be the founder and whether one foundation with two founders or separate foundations would be better, because this affects the beneficiaries’ tax group and PIT on distributions.