Recently, President Andrzej Duda signed the act on family foundations, which determined its inevitable entry into legal circulation (in May 2023). This is a completely new and to some extent revolutionary institution that requires description in this article. What is a family foundation? Who will it be useful for? How to put it on? How does it work? The answers to these and other questions are below.
When will it be possible to establish family foundations?
Family foundations are a new institution in Polish law, but they are known in the legal systems of other countries. Analogous or similar solutions operate in Western countries, such as Austria or Germany, for example. Recently, the act was passed almost unanimously. The Act on Family Foundations will come into force 3 months after its promulgation – exactly from 22 May 2023, the first family foundations can be established and their benefits utilised. It is therefore worth familiarising yourself with the assumptions of this institution, as it may be exceptionally useful for many entrepreneurs – especially those running businesses with their families.
What is a family foundation? What does running a foundation involve?
A family foundation, in accordance with its statutory definition (Article 2 of the Act on Family Foundations), is a legal person established for the purpose of collecting property, managing it in the interest of the beneficiaries and providing benefits to the beneficiaries. Its specific purpose is chosen by the founder in the foundation's statute, i.e. a document specifying the basis of its operation. Put simply, a family foundation is an entity of the nature of a legal person, which is created for the purpose of protecting an enterprise (company) run by a family or at least a member of it. Its creation focused on securing the company and family assets in the inheritance process. The entire idea of the foundation is based on a strict separation of family business and assets from the family itself. It becomes an entity that functions to manage the assets of the company run by the family or part of it, as well as to provide funds for the beneficiaries, and therefore - most likely - family members.
What are the goals of establishing a family foundation?
There are two main and primary tasks of such a foundation. Firstly, it will be the possibility for the founder to accumulate and manage assets, as well as to maintain the continuity of the family business. Secondly, it is worth mentioning the possibility of securing the future of family members as beneficiaries of the foundation (or more precisely, the assets of the company, which become the assets of the family foundation) and the possibility of providing them with continuous financial resources. The most significant advantage of a family foundation seems to be the ability to maintain the durability of a family firm's operations in the event of succession. In practice, in the event of the death of an entrepreneur running a family business who has several heirs, their takeover or the takeover by one of them (whether in the form of a company or sole proprietorship) often requires a series of complex actions, and moreover, exposes the family to internal conflicts, which can be a threat to the company's operations. The establishment of a family foundation, acting as a single entity managing the company and its assets, will allow these complications to be avoided. To summarise this part, therefore: a family foundation will be an independent entity (a legal person) to which the founder will transfer the company and assets of the family enterprise, so that it can professionally manage them without posing a threat to the durability, profitability and efficiency of the business. A family foundation also provides security for the circle of beneficiaries indicated by the founder – this refers primarily to his family, who ran the company with him or were its actual beneficiaries during his lifetime.
How to set up a family foundation?
The legislator has distinguished two modes of establishing a family foundation. Regardless of which one is chosen, certain universal formalities must still be met, which are described below. A family foundation can only be established by the founder. The founder, in turn, can only be an individual who has full legal capacity. Another recurring requirement is for the founder to submit a declaration of intent to establish the family foundation. This can be done in two ways, both of which require the form of a notarial deed:
- Declaration made in the founding act;
- A declaration made in a will.
The key difference highlighted by the legislator between the above is that a foundation established by a constitutive act can have multiple founders, while one whose "founding" declaration of will is made in a will can only have one. This follows from the very system of inheritance law (the absence of "joint" wills), but it has also been highlighted in the Family Foundation Act. The founder themselves may, in the statute, entrust the performance of their duties to another person (defining their scope precisely), and if there are more founders, the rights and obligations are performed jointly (although the statute may introduce different provisions in this respect too). What is also worth emphasising is that the founder is not liable for the obligations of the family foundation. Subsequently, after making the described declaration of will, the establishment of a family foundation requires (Art. 17 and Art. 21 et seq. of the Family Foundation Act):
- Establishing the statute;
- Preparation of an inventory of property;
- Establishment of foundation bodies
- Contribution by the founder of property to cover the founding fund with a value specified in the statute, but not less than PLN 100,000.00;
- Entering the foundation into the register of family foundations.
The foundation itself – much like capital companies before their entry into the National Court Register – becomes a "family foundation in organisation" at the time of the founding deed or will being drawn up. It only obtains legal personality and the capacity to function "fully" upon its registration. All of the above-described steps must be fulfilled for the foundation to begin operating.
Statute and list of beneficiaries
The most important document related to the functioning of a foundation – alongside the deed of establishment itself – is the foundation's statutes. These are established by the founder and define the most crucial matters, such as the name and seat, the rights and obligations of the founder, the method of operation, the value of the initial fund, the rules for appointing and dismissing members or beneficiaries of the foundation with the scope of their rights, and many others. Specific requirements concerning the statutes are set out in Chapter 5 of the Family Foundation Act, specifically Article 26 and onwards. The Act also provides for the status of a beneficiary. Who can be a beneficiary of a family foundation? It can be a natural person, the founder themselves, but also, to a certain extent, a non-governmental organisation engaged in public benefit activities. Obtaining beneficiary status requires the inclusion of the individual on the list of beneficiaries, the requirements for which are described in Article 32 of the Family Foundation Act. The rules for maintaining the list of beneficiaries, the method of their determination, and the scope of their rights should be specified in the statutes.
Foundation bodies
The legislator also listed the basic bodies through which the family foundation operates. These are: the management board, the supervisory board, and the beneficiaries' meeting. Each of them has legally provided, separate functions. The main body is, of course management. He is responsible for running and representing the foundation. He is also obliged to implement the goals set by the founder in the foundation's statute, but also, for example, to maintain a list of beneficiaries or to take care of the financial liquidity and solvency of the company. Board of directors, as specified in Art. 64 of the Act on Family Foundations, is an optional body - it is the founder who decides whether to establish it, unless the number of beneficiaries exceeds 25 people, then a supervisory board must be established. Its members are generally appointed for a 5-year term of office, although the statute may provide otherwise. The basic tasks of the supervisory board are to exercise supervisory functions for the management board in terms of compliance with the law and statutory provisions. The statute may, of course, extend these powers, in particular by specifying that the management board is obliged to obtain the council's consent before taking a specific action. Beneficiary Assembly it is an obligatory body under all conditions. It is composed of all beneficiaries who have been granted the right to participate in it in the statute. As a rule, they are convened by the management board, unless the founder provides separate provisions in this respect in the statute. Its main task is - similarly to similar bodies in commercial law companies - to adopt the most important resolutions regarding the foundation's current activities.
Can a family foundation conduct business activities?
The answer to this question is set out explicitly in the Act. Section 5 stipulates that a family foundation may carry out economic activities, but only to a limited extent. This means that the foundation cannot operate without restriction like a business, but only within the scope of the activities listed in the Act. These are activities directly linked to the foundation’s objectives, and preventing it from carrying them out – which was initially considered during the legislative process – would, to a certain extent, undermine the very purpose of establishing the institution. The most important areas of economic activity permitted by law for a family foundation include those relating to: the disposal of property, provided that such property was not acquired solely for the purpose of subsequent disposal; letting, leasing or similar legal arrangements; joining commercial companies, investment funds, co-operatives and entities of a similar nature. This applies primarily to those based in Poland but also abroad, as well as participation in such companies, funds, co-operatives and entities; the purchase and sale of securities and similar financial instruments; and the granting of loans to specified entities. The legislator has opted for an interesting solution designed to encourage the founder and the foundation’s governing bodies to comply with the above provisions. It has introduced a higher-than-standard CIT rate of 25%, which the foundation will pay only on income derived from business activities other than those described in the Act. The institution of the family foundation is therefore being introduced with a clear purpose, and the Act is structured to achieve that purpose. This purpose is not the broad conduct of business activities as such, as commercial companies already exist for that purpose; so – inter alia through tax measures – the legislator seeks to discourage future founders of such foundations from using them as entities primarily engaged in business activities.
Taxation of a family foundation – basic issues
When analysing the various tax issues in turn, one should start from the moment the foundation is established. Neither the establishment of the foundation nor the transfer of assets will be subject to any form of taxation – not only will we avoid corporation tax (CIT), but also stamp duty, and the founder will not pay personal income tax (PIT). Similarly – as indicated above – the economic activities of a family foundation carried out within the scope permitted by law will not be subject to taxation. Any other economic activities will be subject to an increased CIT rate of 25%. In the event of liquidation, however, the situation is not quite so rosy – the distribution of assets will be subject to 15% CIT. The same CIT rate will apply in the event of a payment to a beneficiary. These are essentially the three main situations in which the foundation will be liable to pay tax (other business activities at 25% CIT, the distribution of assets following liquidation at 15% CIT, and payments to beneficiaries at 15% CIT). Finally, it is also worth describing the situation of beneficiaries who are natural persons and who receive benefits from the foundation. As a general rule, they are liable to pay 15% PIT. Taxation is therefore two-fold – firstly, 15% CIT is payable by the foundation on the distribution of assets, and subsequently 15% PIT is payable by the beneficiary. However, the legislator has provided for a PIT exemption for members of the so-called ‘zero group’, that is, for beneficiaries who are the founder’s immediate family. Specifically, this refers to: the founder’s spouse, the founder’s ascendants, the founder’s descendants, the founder’s siblings, the founder’s stepchildren, the founder’s stepfather or the founder’s stepmother. They will not be liable to pay income tax on benefits received from the foundation.
Is it worth establishing a family foundation?
A family foundation is undoubtedly an interesting option, one that operates effectively abroad and offers scope for growth for many entrepreneurs. It is difficult to say with certainty at this stage how it will be received in our country and how it will fare within the legal framework. In theory, it has the potential to be a great help to all entrepreneurs who run family businesses and who are keen to ensure that their continuity is maintained and remains unshaken. Until now, individual entrepreneurs have been forced to take a creative approach to securing succession by setting up external entities or carefully drafting wills, which still did not provide a 100% guarantee of security. A family foundation, on the other hand, offers the opportunity to fully realise the founder’s interests and to safeguard both the assets and the interests of individual heirs. This applies to both strictly financial matters and personal considerations; after all, when a business is inherited, there may well be a clash of interests and ambitions amongst the heirs. It is also important to note that, by its very nature, the family foundation is sufficiently straightforward that it should be accessible not only to large companies with substantial resources, but also to small and medium-sized entrepreneurs managing family businesses. As part of our firm’s activities, we monitor the legislative and implementation processes relating to family foundations, and we would be happy to take on further assignments in this area. This involves not only the preparation of the necessary documents, but also providing advice on the actual need to establish a foundation in a specific case, determining the appropriate asset management arrangements, and assessing all the business and legal options that would determine its establishment and structure.
We therefore encourage you to contact directly through the channels available on the Law Firm's website, but also by phone or e-mail!