Family foundation – a new way for business succession in 2023

The Act on the Family Foundation, passed by the Sejm on 14 December 2022, is currently awaiting the President’s signature. The purpose of this new law is to protect family assets, minimise the consequences of unsuccessful succession, and guarantee the continuation of business activities in the form of a family foundation. The transfer of assets via instruments provided by the Act is intended to protect them from division, enable their growth, and thus allow benefits to be drawn from them, which can be used to cover the maintenance costs of persons designated by the founder. The primary function of the family foundation introduced by law is to meet the needs of the beneficiaries, who are generally family members.

Family foundation: what does the Act cover?

The Act on the family foundation regulates the organisation and functioning of the family foundation, including the rights and obligations of the founder and beneficiaries. It also introduces amendments relating to inheritance law (especially the right to a reserved portion) and rules concerning taxation connected with the establishment, operation, and dissolution of the family foundation.
The purpose of this new institution will be to fulfil goals defined by the founder, based on the assets transferred by them. This is meant to serve capital accumulation, which in turn increases the chances for undertaking investment activities. The founder is given flexibility to specify detailed objectives and outline the vision for the family foundation’s activities.

Only a natural person with full legal capacity may be a founder, transferring assets to the family foundation (either all or part of their estate, depending on their will). The family foundation may be established by more than one person, including unrelated individuals. Exceptions apply only in cases where the family foundation is established by testament (Polish inheritance law allows a will to be made by only one testator). The family foundation will provide specified benefits to the beneficiaries indicated by its founder. A beneficiary — i.e., a person deriving benefits according to the founder’s will — may be a natural person, a non-governmental organisation conducting public benefit activities, or the founder of the family foundation. The Act does not require a familial relationship between the founder and beneficiary. The foundation’s assets transferred by the founder will constitute the founding fund, whose value must not be less than PLN 100,000, both upon establishment and during the foundation’s operation.

In Poland, the family foundation will be able to receive donations. It is important to note that there is no risk connected with donations made by any persons, including donations from subsidiaries of the family foundation. A donor making a donation does not become a founder. This allows for the pooling of assets, especially in cases of co-ownership. Besides the founding document (the founding deed or testament), the statute will play a key role. It will regulate the most important aspects related to the operation of the family foundation and the bodies established within it. Additional organisational matters may be governed by internal regulations, depending on the wishes of the founder and members of the foundation’s bodies.

Family foundation: organisation

The governing body of the family foundation will be the management board. It will be responsible, among other things, for fulfilling the foundation’s objectives and taking actions to ensure financial liquidity and solvency. The supervisory board is an optional body, which becomes mandatory if the number of beneficiaries exceeds 25 persons. Members of the supervisory board must be natural persons with full legal capacity.
The Act also requires the establishment of a beneficiaries’ assembly, whose main purpose will be to ensure the continuity of the foundation’s other bodies and thereby proper functioning of the family foundation. Beneficiaries who simultaneously serve in the foundation’s bodies must comply with the statute and consider the founder’s will to the same extent as board members without beneficiary rights. Registration of the family foundation in the family foundations register will grant it legal personality. The founder will file the registration; if the foundation is established by testament, the management board will do so. The register will contain information about the family foundation that must be kept up to date by the management board.

The family foundation will bear joint and several liability for the founder’s obligations arising before the foundation’s establishment. It may also be liable for the founder’s maintenance obligations incurred before or after the foundation’s establishment if enforcement against the founder’s assets proves ineffective (subsidiary liability). Thus, the family foundation will be responsible for overdue, current, and future obligations of the founder towards persons entitled to maintenance. Claims of persons entitled to maintenance, whether beneficiaries or not, will be satisfied first. The foundation’s liability is limited to the value of the assets contributed by the founder.

The new law also provides mechanisms for the termination and liquidation of the family foundation, similar to those in company law. The foundation will be dissolved if the appropriate foundation bodies adopt a relevant resolution. In exceptional cases, the court may dissolve the foundation.

The Act confirms the possibility of renouncing the right to a reserved portion (in whole or in part), as well as options to defer payment, pay in instalments, or reduce the reserved portion, taking into account the personal and financial situation of the person entitled to the reserved portion and the person obligated to satisfy the claim. Furthermore, benefits received from the family foundation by an entitled person will reduce the value of the reserved portion, and the reserved portion received will reduce the value of future benefits payable by the foundation to that beneficiary.

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Family foundation and taxes

Regarding taxation, the following aspects should be noted. Acquisition by natural persons of benefits or assets from the family foundation in connection with its dissolution will be subject to personal income tax, with rates depending on the degree of kinship between the beneficiary and the founder (exemption for the founder and close persons belonging to the so-called “zero group” defined in the Inheritance and Donations Tax Act — i.e., spouse, descendants, ascendants, stepchildren, siblings, stepfather and stepmother; 15% tax rate for others). Only the portion of benefits or assets acquired by the founder or persons in the “zero group” proportional to the founder’s current share listed in the asset inventory will be exempt from personal income tax. The family foundation itself will be liable for corporate income tax at 15% on benefits or assets transferred or made available directly or indirectly by the foundation in connection with its dissolution.
The VAT consequences of transactions and events connected with the introduction of the family foundation into the legal system will be determined in specific factual circumstances based on existing national VAT regulations, considering VAT Directive provisions and other EU laws. The Act does not introduce changes in this regard.

Additional information and the full text of the Act are available on the government website at the following link: Family Foundation – Ministry of Development and Technology – Gov.pl Portal (www.gov.pl)