On 22 May 2023, the Family Foundation Act came into force. The aim of the new law is to protect family assets, minimise the consequences of a failed succession and guarantee the continuation of business activities in the form of a family foundation. The transfer of the assets through the instruments provided by the law is intended to protect them from distribution, to enable them to be multiplied and therefore to benefit from them, which will be able to be used to cover the living expenses of the persons designated by the founder. Indeed, the main function of the family foundation introduced by the law is to meet the needs of beneficiaries, i.e. as a rule family members. How will the foundation affect family businesses?
Family foundation: what does the law contain?
The law on the family foundation regulates the organisation and operation of the family foundation, including the rights and obligations of the founder and the beneficiary. Complementary changes are also introduced with regard to the right to inheritance and taxation rules in connection with the establishment, operation and dissolution of a family foundation.
The task of the new institution will be to achieve the objectives set by the founder, based on the assets donated by the founder. This is to serve the purpose of capital accumulation, which in turn increases the chances of investment activity. In doing so, the founder will be given some flexibility to define the specific objectives and outline the vision of the family foundation.
The founder will only be able to be an individual with full legal capacity to transfer assets to the family foundation (either all or part of the founder’s assets, depending on the founder’s wishes). A family foundation will be able to be established by more than one person, also by unrelated persons. Exceptions to this will be made only in the case of establishing a family foundation on the basis of a will (Polish inheritance law allows for the possibility of making a will by only one testator). A family foundation will provide certain benefits to the beneficiaries designated by its founder. The beneficiary, i.e. the person benefiting in accordance with the founder’s will, will be a natural person, a non-governmental organisation conducting public benefit activity or the founder of the family foundation. The law does not provide for a relationship requirement between the founder and the beneficiary. The assets of the family foundation created by the founder’s endowment will constitute the founding fund, the value of which should not be less than PLN 100,000, both at the establishment of the family foundation and later, during its operation.
A family foundation in Poland will be able to receive a donation. In doing so, it should be noted that there is no risk associated with making donations by any individuals, including when making a donation by subsidiaries of a family foundation. By making a donation, the donor will not become a founder. This is to enable the pooling of assets, particularly in the case of joint ownership. In addition to the document establishing the family foundation, i.e. the foundation deed or the will, the statutes will play the most important role. It will regulate the most important aspects of the operation of the family foundation and the organs established therein. Additional organisational issues will be able to be regulated in the bylaw(s), depending on the will of the founder and the members of the family foundation bodies.
Family foundation: organisation
The governing body for the family foundation will be the board of directors. It will be responsible for, among other things, achieving the objectives of the family foundation and taking steps to ensure its liquidity and solvency. As a matter of principle, the supervisory body, the supervisory board, is an optional body for the family foundation. The obligation to appoint a supervisory board will arise when the number of beneficiaries exceeds 25. A member of the supervisory board will be able to be an individual with full legal capacity.
The Family Foundation Act also provides for the obligation to establish a beneficiaries’ assembly, the main purpose of which will be to maintain the continuity of the functioning of the other bodies and thus the proper operation of the family foundation. Beneficiaries, while serving in the bodies of the family foundation, will be obliged to comply with the statutes and to take into account the will of the founder, to the same extent as members of these bodies who do not have beneficiary rights. The registration of the family foundation in the register of family foundations will enable it to acquire legal personality. Notification of the establishment of a family foundation will be made by the founder and, in the case of the establishment of a family foundation in a will, by the board of trustees. The register will disclose the details of the family foundation, which, in view of the need for the board to report changes to them, should remain up-to-date.
The family foundation will be jointly and severally liable for the founder’s obligations incurred prior to the establishment of the family foundation. In addition, it will be able to be liable for the founder’s maintenance obligations arising both before and after the establishment of the family foundation when enforcement of the founder’s assets is unsuccessful (subsidiary liability). The family foundation will therefore be liable for the founder’s outstanding, current and future obligations towards the person subject to the maintenance obligation. Claims of persons towards whom the founder has a maintenance obligation, whether they are beneficiaries or not, will be satisfied first. In doing so, the liability of the family foundation is limited to the value of the property contributed by the founder.
The new legislation also provides mechanisms for the termination of a family foundation and its liquidation similar to the solutions known in company law. The family foundation will be dissolved if the competent bodies of the family foundation pass an appropriate resolution to that effect. In exceptional cases, the family foundation will be able to be dissolved by a court.
The possibility to waive the right to a reserved share (also in part) and the possibility to spread, defer or even reduce the amount of the reserved share, taking into account the personal and financial situation of the person entitled to the reserved share as well as of the person obliged to satisfy the reserved share claim, will be introduced. In addition, the benefits received from the family foundation by the beneficiary will reduce the value of the reserved share and the received reserved share will reduce the value of future benefits to which the beneficiary is entitled from the family foundation.
A family foundation and taxes
The following aspects should be pointed out with regard to the taxation of a family foundation. The acquisition by individuals from the family foundation of benefits and property in connection with the dissolution of the family foundation will be taxed with personal income tax, in an amount depending on the degree of the beneficiary’s relationship to the founder (exemption in the case of the founder and relatives belonging to the so-called ‘zero group’ in relation to the founder, as defined in the Inheritance and Donation Tax Act, i.e. spouse, descendant, ascendant, stepchild, sibling, stepfather and stepmother, 15% in the case of other persons). Only the portion of such benefit or property acquired by the funder or a person belonging to ‘group zero’ in relation to the funder, corresponding to the current proportion specific to that funder in the estate inventory, will be exempt from personal income tax. The family foundation will, in turn, be subject to the income tax introduced in the Corporate Income Tax Act on the benefit transferred or made available by the family foundation directly or indirectly and the property in connection with the dissolution of the family foundation at a rate of 15 per cent.
The VAT consequences of transactions and events carried out in connection with the introduction of a family foundation into the legal system will be determined in specific factual situations on the basis of the existing national VAT legislation taking into account the regulations arising from the VAT Directive and other EU legislation. The Act does not introduce changes in this respect.