As expected, the Sejm adopted a package of tax changes that, among other things, amend the rules for taxing family foundations. As expected, because earlier, when the provisions on family foundations in Poland came into force, I expressed the opinion that given the tax status of these foundations proposed by the legislator at that time, it would end with them being widely used for tax optimization. Then, when the Ministry of Finance realized what was happening, we would immediately have “system tightening” and hasty changes to tax regulations concerning family foundations.
And that is exactly what happened. The President’s veto of the act, in my opinion, will only slightly delay these changes, as they are inevitable. However, it perfectly illustrates the lack of legal certainty that persons planning to use a family foundation in Poland must face.
Changes in taxation of family foundations in Poland
Let us therefore look at what fundamental changes the new regulations introduce in the taxation of family foundations:
- Taxation of income of a family foundation from the disposal of assets, if the disposal occurs before 36 months from the end of the year in which the property was contributed to the family foundation.
- Taxation of income of a family foundation obtained through tax-transparent entities.
- Subjecting the family foundation to controlled foreign company (CFC) provisions and taxation of income from unrealized gains (exit tax).
- Taxation of income of a family foundation from so-called short-term rental agreements.
Apart from the fact that these changes are not surprising, I consider them justified, as they touch upon one of the fundamental principles relating to family foundations. A principle that I always mention to my clients during consultations on asset protection, and which unfortunately meets with great reluctance on their part.
What is the purpose of establishing a family foundation?
This principle is that the purpose of a family foundation is not and should not be to achieve tax benefits. The purpose of a family foundation is to ensure security and stability for the founder and their assets. Attempting to combine these two goals will most likely result in neither tax benefits nor stability and security. In other words, a family foundation is a legal entity that should be tax-neutral. It is not for making money!
In this context, it is therefore incomprehensible why the legislator, when creating the concept of a family foundation and introducing this legal form into the Polish legal system, equipped foundations with such a set of tax benefits that directly encouraged the use of these legal vehicles for tax optimization. Frankly, for any lawyer who has been in this profession for more than a few years, it was obvious that this would end with hasty patching of tax regulations.
This situation leads us to the second fundamental principle on which the concept of a family foundation is based. And it states that the primary purpose of a family foundation should be to ensure stability, predictability, and security for the founder’s assets contributed to the foundation.
Let us therefore ask ourselves whether in Poland, we are dealing with a stable and predictable legal and tax system? The answer is so obvious that I do not need to provide it here. You know it perfectly well yourselves.
The brutal truth is that in Poland, at least in the near term, there is no such legal and tax stability and there will not be for a long time. One can list: the dispute at the Constitutional Tribunal, the dispute at the National Council of the Judiciary, the dispute over who is and who is not a judge, waiting several years for an indictment or after its filing for the start of a trial, the problem of pre-trial detention, and finally permanent changes in tax laws.
Family foundation in Liechtenstein: predictability has its price
That is why, from the very beginning, when it comes to establishing family foundations, I maintain that the only country where it is worth considering establishing such an entity is the Principality of Liechtenstein. Yes, such a foundation is more expensive to establish and maintain, but premium products have a tendency to cost more.
A potential founder of such a vehicle should ask themselves whether they feel comfortable with the fact that, in the case of establishing a family foundation in Poland, the delicate matters of their family and their life’s achievements will be handled by a neo-judge of a District Court, whose rulings may not be valid, an overburdened judge of the Regional Court in Warsaw, where one waits 2 years for a criminal trial date, or perhaps that judge who wanted to knock a colleague off the bench.
In the case of a family foundation based in the Principality of Liechtenstein, we have the certainty that our family matters will be handled by three-instance professional courts, in one of the most stable and predictable jurisdictions in Europe.
It is therefore quite obvious that a family foundation in Poland is, under current conditions, simply a legal and tax roulette organized by the Ministry of Finance, and in this game, as we know, the house always wins.
Paweł Osiński
Attorney