The publication of a new Bill on Family Foundations on 15 October 2021 (the “Bill”) could have passed unnoticed in the flurry of intensive legislative works on the “Polish Deal”, and undeservedly so, as — if compared to the previous bill published in March 2021 — the new Bill brings significant changes which, to a large extent, seem to address the concerns raised in the public consultations phase. In this alert we will outline the key tenets of the Project in a nutshell.

• The essence and purpose of family foundations
• Incorporation of a family foundation
• Family foundation assets
• Taxation
• Family foundation as a holding company
• Foundation bodies
• Inheritance issues
• Trading in agricultural real estate

The essence and purpose of family foundations

Family foundations are legal institutions successfully operating in many Western European legal systems, especially in German-speaking countries (Liechtenstein, Switzerland and Austria), where they are known as Familienstiftung. They enable their creators – who are usually founders of a family business — to lay down the rules that many future generations will need to adhere to in managing the family’s companies and benefiting from the income they generate. To this day, Polish entrepreneurs seeking to plan intergenerational succession have had no alternative but to avail themselves of overseas family foundations as the Polish legal system knew no similar solutions they could choose instead. This is set to change with the legal introduction of Polish family foundations.

Family foundations, as outlined in the Bill, are intended to facilitate intergenerational succession without the testator’s heirs being forced to liquidate his/her assets to make mutual settlements between them. The intention behind this measure is to ensure longevity of the businesses high-value testators built and contributed to a family foundation. The family foundation will not issue any securities carrying the right to participate in the foundation’s income or assets in exchange for the contributed assets. As a result, the assets held by a family foundation will not become part of the foundation founder’s (testator’s) inheritance estate.

The Bill stipulates that a family foundation shall manage and protect the foundation’s assets and provide benefits to the foundation beneficiaries, i.e., individuals or NGOs conducting public benefit activities.

Incorporation of a family foundation

Only a natural person with full legal capacity may act as a founder of a family foundation. A family foundation will be incorporated on the basis of a statement made to this effect in a deed of foundation incorporation or the testator's last will and testament. Notably, a family foundation may be set up by more than one founder.

As soon as the deed of incorporation has been executed or the testator’s last will has been opened (the latter is an official procedure launched after the testator's death to confirm, among other things, that the deceased left behind a last will) a family foundation under formation (in statu nascendi) will be deemed to have been created. The above notwithstanding, the family foundation will only acquire full legal personality upon registration in the Family Foundations Register kept by the Regional Court in Warsaw.

Family foundation assets

The Bill does not provide a fixed list of asset types which may become part of a family foundation. Under the Bill, the assets of a family foundation will include:

• the founding fund contributed by the founder;
• donations made by the founder, his/her lawful heirs, the founder's spouse, immediate relatives, and by overseas trusts¹.
• Moreover, the foundation’s assets will also include any such income as may be earned by the foundation from dividends and profit distributions made by the family foundation’s subsidiaries, as well as from the business activity conducted by the family foundation in strictly defined areas (such as trading in the foundation’s property, renting property, lending money, or running an agricultural holding).

Taxation

A family foundation will be subject to CIT. Income obtained by a family foundation from its founder for the purpose of pursuing the foundation's objectives and the founding fund will be tax-free.

Transactions between a family foundation and its beneficiaries will not be subject to transfer pricing regulations.

Income earned by family foundation beneficiaries who are the founder’s close relatives will be effectively taxed only once – either with the tax on inheritances and donations (the “PSD tax”) at the beneficiaries level, or with CIT at the family foundation level:

• Income generated by a family foundation on capital gains (e.g. dividends from subsidiaries or sales of shares in subsidiaries) and interest from overseas trusts (although certain special conditions will apply in the latter case) will be exempt from CIT. That said, disbursement of this income to family foundation beneficiaries will be subject to the PSD tax at a rate of 19%.
• All the other types of family foundation income will be taxed with CIT in accordance with general principles, although they may become eligible on general terms for the reduced 9% rate (applicable to so-called small taxpayers or taxpayers starting their activity). Distributions made by a family foundation from such income to the fund’s founder and his/her close family (meaning any person in the ‘first tax band’ for the PSD tax purposes) will be exempt from the PSD tax. Distributions made to other beneficiaries will be taxed at the same rates and in accordance with the same rules as those that would apply if the beneficiary received the distribution directly from the funder. As a result, individuals in the second tax band (certain collateral relatives other than siblings and certain affinity relatives) will be eligible for reduced PSD rates even if they receive a donation from a family foundation in respect of which they fall in the third tax band. This means an “upgrade” to the 2nd tax band where PSD tax rates of 7%, 9%, and 12% will apply instead of the 12%, 16%, 20% rates applicable to the 3rd tax band. The family foundation will be the PSD tax withholding agent. In practice, this means that the family foundation will spare the beneficiaries the trouble of attending to formalities in connection with PSD settlements on the benefits received from the family foundation.

In the case of family foundations established by more than one founder, beneficiaries who are close family members of one of the founders will benefit from the above PSD tax exemption if the distributions they receive are derived from the property contributed to the family foundation by that founder and/or income from that property. Consequently, payments coming from e.g. donations made by another founder, who was not a close family member of the given beneficiary, will not be eligible for the above exemption.

The foregoing aside, the above rule introduced to limit the scope of PSD tax exemptions should be of little practical significance, since family foundations established by several Polish residents abroad are usually set up within the nuclear family (i.e. by parents – the creators of the business and their children – the successors). With this type of family links between founders of future Polish family foundations, the PSD tax exemption will generally be available to all direct descendants or ancestors of any of the founders, regardless of whose assets will be used to make a disbursement.

Unfortunately, the Bill lacks any express stipulations regarding tax exemptions for a Polish family foundation that receives assets from a foreign foundation or from the founder of such a foundation. This would be particularly important for those Polish entrepreneurs interested in relocating their foreign foundations to Poland after the Polish Family Foundation Law comes into force.

Family foundation as a holding company

Family foundations will be allowed to conduct business activities in a restricted and narrowly defined scope. Among other things, a family foundation will be able to join and/or participate in commercial law companies, dispose of shares (all rights and obligations) in such companies and grant loans to such companies. This will enable the family foundation to serve as a holding vehicle without having to create an additional holding company below the foundation level. Importantly enough, capital gains earned by the foundation from dividends received from subsidiaries and from the sale of shares in such companies are to be tax exempt.

Foundation bodies

• The primary, mandatory corporate body of a family foundation will be the management board, which will manage the affairs of the family foundation and represent it externally.
• In the charter of a family foundation, the founder may furthermore establish a board of protectors, provided that this body must be established if the number of foundation beneficiaries exceeds 25 persons. The board of protectors will perform supervisory functions and oversee the management board’s compliance with the law and the provisions contained in the charter.
• Besides, a family foundation will also hold meetings of beneficiaries, attended by eligible beneficiaries vested with the right to take part in such meetings under the charter. The meeting of beneficiaries will be a corporate body with limited powers, generally narrower than those of a general meeting of a limited liability company. The Bill provides that resolutions of the meeting of beneficiaries will be required to review and approve the management board activity report and the family foundation’s financial statements, to discharge officers of their duties, and in other matters required under statutory law (e.g., to fill in vacancies) or the Charter.

Inheritance issues

The Bill proposes certain amendments to the section of the Civil Code governing inheritance matters. Namely:

• Property donated or gifted by a testator to the family foundation will be added to calculate the forced share (legitime) of the inheritance. However importantly, donations made to a family foundation over 10 years before the founder's death will not count towards the forced share of the inheritance estate. A family foundation that has received donations from the foundation founder will become one of the obligees charged with the task of satisfying claims brought by persons eligible to receive the force share.
• Claims on account of forced share may be spread in installments by the court or by mutual agreement between the parties. These regulations may enable a family foundation to satisfy a force share claim without having to liquidate the family foundation's business (notably, a family foundation's business is defined as a private individual's business and shareholdings received by the foundation).
• The law will now give the closest family members an explicit right to waive their right to receive the forced share. Owing to the above, the future testator (the founder of a family foundation), while still alive, will be able to sign agreements with his/her closest family (descendants, spouse, parents) whereby they will waive their right to forced share claims, thereby avoiding a situation where forced share claims could jeopardize the integrity of the family foundation’s assets. Moreover, if one member of the testator's immediate family waives the right to receive a forced share, the forced shares of other members will not increase proportionally.

Trading in agricultural real estate

The Bill also proposes amendments to the Agricultural System Act to make it easier for family foundations and close family beneficiaries to acquire agricultural land.

According to the proposed amendments, the acquisition of agricultural land by a family foundation or a close relative of the founder will not require the approval of the Director General for the National Agricultural Support Center (“KOWR”). Additionally, if the beneficiary is a close relative of the founder and receives agricultural land from a family foundation, s/he will not be required to conduct any farming business as otherwise required by statutory law. Moreover, KOWR will now have no right to purchase agricultural land to be acquired by a family foundation or the foundation founder’s close relative unless the foundation was to acquire such land through a contract of sale. In practice, this means that agricultural land contributed by a founder to a family foundation cannot be acquired by KOWR.

On the other hand, the current wording of the Bill does not facilitate transfers of shares in companies that own or are perpetual usufructuaries of agricultural land with a surface area over 5 hectares to a family foundation. This means that to contribute shares in such companies to a family foundation it will be necessary to let KOWR exercise the right of first refusal. That said, we hope that this problem will be solved in the final wording of the Family Foundation Act.

The Bill is in its early stages of legislative work – it is currently being processed by the Government Legislation Centre. The solutions presented in the Bill are subject to change, especially that the author of the bill, i.e. the Ministry of Development and Technology, is still receiving comments and opinions on the Bill. According to the Bill, the Family Foundation Act is planned to take effect as of 1 June 2022.

1. Within the meaning of the Bill, an ‘overseas trust’ is a legal structure governed by foreign laws where ownership or possession of assets is transferred to a trustee who manages the fund and distributes the trust assets or otherwise makes them available to beneficiaries.
2. The forced share is a mechanism provided for in inheritance law to protect the testator's closest family members (i.e. descendants, spouse and parents) from the adverse consequences of the testator omitting them in his/her will or bequeathing them less than their statutory share of his/her estate, as well as from the consequences of the future testator disposing of his/her assets by donations given to persons other than his/her immediate family.