Contributing an Enterprise to a Family Foundation: The Most Tax-Efficient Solutions
The Family Foundation Act does introduce a closed list of the types of business activity that a foundation may conduct. It is worth emphasising, however, that a family foundation (fundacja rodzinna) may join commercial companies, investment funds, cooperatives and entities of a similar nature that carry on business activity going beyond the statutory list of permitted business activity. For example, a family foundation may hold assets in companies conducting other types of business activity that go beyond the statutory list.
A Family Foundation Joining Commercial Companies
As regards a foundation joining commercial companies, the following assets may be contributed to a family foundation:
- in partnerships:
- all the rights and obligations of a partner in a general partnership,
- all the rights and obligations of a partner in a limited partnership,
- all the rights and obligations of a partner, or shares, in a limited joint-stock partnership,
- in capital companies:
- shares in a limited liability company (sp. z o.o.),
- shares in a simple joint-stock company,
- shares in a joint-stock company.
- in a civil-law partnership (spółka cywilna): co-ownership.
See also: Company audit (due diligence)
As regards contributing property to a family foundation, the Law Firm offers:
- any transformation of the legal form of the business needed to set up a family foundation,
- drafting a statute adapted to the company's situation, the family situation and the founder's needs,
- preparing the documents needed to set up a family foundation,
- registering the family foundation,
- drawing up agreements transferring ownership of items of property to the family foundation (for example, an agreement donating shares in a limited liability company to the foundation or an agreement donating real estate to the foundation), both at the stage of contributing property to cover the founding fund and after the family foundation has been registered,
- comprehensive assistance with the valuation of property and with notarial acts.
Contributing a Sole Proprietorship to a Family Foundation
A sole proprietorship (jednoosobowa działalność gospodarcza, JDG) as such cannot be contributed to a family foundation. The solution here is to make a contribution in kind of the enterprise or an organised part of the enterprise to the family foundation (in simple terms, this means an organisationally and financially separate set of assets located in the JDG). The first step is to analyse the scope of the assets being contributed to determine whether they constitute an enterprise or an organised part of an enterprise. The enterprise (or organised part of the enterprise) is then valued. Because of the change of entity, all agreements concluded by the JDG must be amended by annex (alternatively, the family foundation may sign new agreements with the JDG's existing counterparties).
See also: Business law (in Polish)
Where real estate and movable property belonging to the JDG are contributed to a family foundation, they must be valued as at the moment of contribution (discussed in more detail below). After the real estate has been contributed to the foundation, the foundation may carry on activity consisting of letting it. Letting of real estate by the foundation is exempt from CIT (it falls within the list in Article 5 of the Family Foundation Act, which sets out the types of business activity whose conduct by a family foundation is fully exempt from CIT). Conduct by a family foundation of a type of business activity going beyond this list is subject to a penalty tax of 25%.
Most types of business activity conducted by a JDG go beyond the list in Article 5 of the Family Foundation Act. Contributing an enterprise or an organised part of an enterprise to a family foundation will result in a penalty tax of 25% being imposed on it. Because of the penalty tax, the more favourable solution will therefore be to transform sole proprietorships into commercial companies. The list of permitted types of business activity that a family foundation may conduct includes, among other things, a family foundation joining commercial companies. This activity is exempt from CIT (the rate is 0%). A family foundation's holding of, for example, shares in a limited liability company is not equivalent to the foundation conducting the business activity of that company. The restrictions in Article 5 of the Family Foundation Act do not apply and the 25% penalty tax does not apply. The activity of a family foundation consisting of holding shares in a limited liability company is exempt from CIT.
The More Tax-Efficient Solution
For comparison, the taxation of the activity and of the payment of benefits to the beneficiaries of a family foundation is as follows (using a limited liability company as an example):
- for a limited liability company: 19% CIT (the company's activity) + 0% CIT (the foundation's activity) + 15% CIT (the foundation pays tax on the payment of benefits to the beneficiary) + 0/10/15% PIT depending on the tax group, discussed further below (the beneficiary pays tax on benefits paid to them) = 34%,
- where an enterprise or an organised part of an enterprise (JDG) is contributed: the business activity previously conducted by the JDG will be conducted by the family foundation, which results in a penalty tax of 25% being imposed on the foundation if the type of business activity conducted goes beyond the list in Article 5 of the Family Foundation Act (as will be the case in most situations). The tax is therefore 25% (the foundation conducting activity outside Article 5 of the Family Foundation Act) + 15% CIT (the foundation pays tax on the payment of benefits to the beneficiary) + 0/10/15% PIT depending on the tax group, discussed further below (the beneficiary pays tax on benefits paid to them) = 40%.
The more tax-efficient solution is therefore to transform the JDG into a limited liability company first.
See also: Legal services for businesses
PIT Thresholds
The amount of PIT that a beneficiary pays on a benefit paid to them by the family foundation depends on the tax group to which the beneficiary belongs. To expand on the PIT issue raised above, the thresholds are:
- 0% for persons in the zero kinship group in relation to the founders, that is: spouse, descendants, ascendants, stepchild, siblings, stepfather and stepmother;
- 10% for persons in kinship groups I and II in relation to the founders, that is: son-in-law, daughter-in-law, parents-in-law, descendants of siblings, siblings of parents, descendants and spouses of stepchildren, spouses of siblings and siblings of spouses, spouses of siblings of spouses, and spouses of other descendants;
- 15% for other persons.
See also: Legal services for companies
Valuation of Items of Property Contributed to a Family Foundation
Items of property are contributed to a family foundation in two ways: (i) in the statute, to cover the founding fund (the minimum amount of the founding fund is PLN 100,000), or (ii) after the foundation has been set up, by contributing property to the existing family foundation. Where real estate, an enterprise or an organised part of an enterprise, or other assets are contributed to a family foundation, they must be valued. When setting up a family foundation, the founder draws up an inventory of property (according to the condition and prices at the time the items of property are contributed and their tax value), and the foundation's management board is then responsible for updating the inventory.
You will find more information on the legal assistance KHM Law Firm provides in setting up family foundations here: Family foundation law firm (in Polish)
