A family foundation is a legal entity created to protect family assets and ensure their smooth transfer to future generations. In Poland, family foundations are taxpayers of corporate income tax (CIT) and, as a rule, benefit from the entity exemption. However, in certain situations, such as the payment of so-called hidden profits, the foundation is obliged to pay 15% CIT. What benefits are considered hidden profits and what tax obligations accompany their transfer? Here is the key information, enriched with tax interpretations and case law of administrative courts.
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What are hidden profits in a family foundation?
Hidden profits in a family foundation are specific benefits transferred by the foundation to the founder, beneficiaries or related entities. They are subject to taxation at the rate of 15% CIT. According to the provisions of the CIT Act, the list of hidden profits is closed, which means that only the benefits listed therein are considered hidden profits and taxed. Hidden profits include, among others:
- Interest, commissions and salaries from loans granted to the foundation by the founder, beneficiary or related entities.
- Donations and other free or partially paid benefits, which do not fall within the provisions of the Family Foundation Act.
- Remuneration for advisory, legal, accounting or advertising services, provided to the foundation by related persons.
- Loans granted by the foundation to beneficiaries, if their repayment period is at least 10 years.
Example: If the beneficiary grants a loan to the foundation and receives interest from it, the amount of this interest will be considered a hidden profit and taxed at the 15% CIT rate.
Practical examples of hidden profits
Example 1: Using the foundation's real estate
A family foundation manages a luxury house in the mountains, which is formally its property. The founder and his family use the property for private purposes without paying any fees. In such a situation, tax authorities may consider that the foundation provides a gratuitous benefit to the founder and his family.
Tax consequences:
- The market value of the use of the real estate by the founder will be classified as hidden profit and taxed at the 15% CIT rate.
- To avoid problems, the foundation should set the rental fee at market level and ensure appropriate documentation (e.g. lease agreement).
Example 2: Car use by the beneficiary
The family foundation has a private car, which is formally intended to serve the foundation's operational activities. The foundation's beneficiary, a family member of the founder, uses the car for daily commuting to work and vacation trips, without keeping a record of the vehicle's mileage.
Tax consequences:
- The market value of the private use of the car will be considered as hidden profit.
- The Foundation will be obliged to pay PLN 15% CIT on the value of the benefit, e.g. a monthly amount corresponding to the market value of renting a similar vehicle.
Recommendation:
A foundation can avoid taxation by implementing a detailed car use policy, including keeping mileage records and charging private use at market rates.
Hidden profits and the use of foundation assets
The use of foundation assets, including personal vehicles or real estate, can lead to hidden profits if these benefits are not properly regulated. To avoid tax problems, it is worth implementing transparent rules for the use of assets and maintaining appropriate documentation.
Tax interpretations and administrative court rulings
Individual interpretation of August 11, 2023 (ref. no. 0114-KDIP2-1.4010.341.2023.1.KW)
The tax authority indicated that the list of events considered hidden profits, specified in Article 24q, Section 1a of the CIT Act, is closed. An example is the question regarding the payment of real estate rent by a foundation to the founder.
Conclusions from the interpretation:
- If the foundation pays rent set at market level, this benefit will not be considered hidden profit because it does not fall within the catalogue specified in the regulations.
- The closed nature of the catalogue gives family foundations the ability to precisely plan their activities in order to avoid the classification of some benefits as hidden profits.
Individual interpretation of February 13, 2024 (ref. no. 0111-KDIB1-2.4010.283.2024.2.AK)
The applicant, a family foundation, asked about granting loans to beneficiaries for periods of less than 10 years. The tax authority explained that these loans would not be considered hidden profits as long as their repayment period was less than 10 years.
Conclusions from the interpretation:
- Loans to beneficiaries for short periods (less than 10 years) do not give rise to hidden profits.
- If the loan period is extended (e.g. by an addendum), this may result in it being classified as hidden profit.
Judgment of the Voivodship Administrative Court in Łódź (ref. I SA/Łd 313/24)
The court considered the case of the founder's remuneration for management services provided to a family foundation. This remuneration was classified as hidden profit because it was a benefit transferred directly to the founder and was not of a market nature.
Conclusions from the ruling:
- The founder's remuneration for management services, if not at market level, may be considered a hidden profit.
- The court stressed that family foundations should avoid situations in which benefits for founders do not meet market principles.
Summary
A family foundation is a modern solution that enables effective management of family assets, protection of their integrity and ensuring smooth transfer to subsequent generations. Thanks to its unique features, a family foundation allows for long-term preservation of the value of assets and realization of family goals in an orderly manner.
However, despite its many benefits, a family foundation is an entity with a complex legal and tax structure. It requires compliance with numerous regulations, such as rules on hidden profits and careful planning regarding asset management and benefits for beneficiaries.
For this reason, it is worth using the help of experts – tax advisors, lawyers and accountants – who will help you avoid mistakes, ensure compliance with legal regulations and enable you to fully utilize the potential of your family foundation.
The decision to establish a family foundation is a step towards securing the future of the family. With the help of specialists, you can make it a solid foundation of assets for generations.
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