Personal Income Tax in a Family Foundation – What Do You Need to Know?
Family Foundation is a relatively new solution in the Polish legal system, which has gained popularity as a way to secure assets and their succession. In the previous article, we pointed out the preferential rules for CIT taxation, it is worth paying attention to the issues of personal income tax (PIT) on the side of the foundation's beneficiaries. What tax obligations are incumbent on people receiving benefits from a family foundation?
We answer below.
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Family Foundation Taxes – A Brief Overview
Family Foundation is subject to corporate income tax (CIT), but the legislator has provided special rules for it. Until the benefits are paid to the beneficiaries, the foundation does not pay CIT on the accumulated assets and their multiplication. As already indicated, the CIT tax liability on the side of the family foundation will arise only when the benefit is transferred to the beneficiaries. The tax base for the foundation will then be the market value of the benefit transferred to the beneficiary. In such a case, the CIT rate for the family foundation is a flat rate and amounts to 15%.
Beneficiaries of a family foundation receive funds in the form of benefits specified in the foundation's statute. These include cash payments, coverage of education costs, health care, and use of the foundation's assets.
How are these benefits taxed for beneficiaries?
It is at the time of payment of benefits to beneficiaries that the Family Foundation, as the payer, is also obliged to tax the benefits paid to beneficiaries with personal income tax.
Personal income tax rate.
The PIT tax rate depends on the degree of relationship of the beneficiary to the founder:
- **0% PIT for immediate family** – If the beneficiary belongs to the so-called zero group (e.g. spouse, children, grandchildren, parents), the benefits are exempt from PIT.
- **10% for persons from the I and II group of kinship** – Son-in-law, daughter-in-law, parents-in-law, siblings of parents and other indicated persons will pay 10% PIT.
- **15% PIT for extended family and unrelated persons** – e.g. siblings, cousins or unrelated persons will pay PIT tax at the 15% rate.
Contribution ratio.
It remains important that when determining the amount of tax, not only the tax rate is important, but also the value of the contributions made by individual founders, because in accordance with Art. 21 sec. 49 of the Personal Income Tax Act, the settlement depends on the proportion of contributions from individual beneficiaries to the family foundation.
Property contributed to a family foundation by way of a gift or inheritance by the founder or his spouse, descendants, ancestors or siblings is considered to have been contributed by the founder. In the event that property is contributed to a family foundation by one of the above persons, the proportion of the value of the property contributed by the founder will continue to be 100%, and benefits received by beneficiaries who are the founder's closest family will be fully exempt from PIT.
However, if property is contributed to a family foundation by a person outside the above group, such property will be considered as contributed by the family foundation. In such a case, the proportion of the value of the contributed property will change in a way that is disadvantageous to the beneficiaries receiving the benefits, resulting in the obligation to tax a part of the benefits paid with personal income tax in accordance with the established proportion.
For example, if the total value of the assets contributed by the founder and his/her close persons amounts to PLN 300,000, and the value of the assets contributed by other persons amounts to PLN 100,000, then the proportion of the value of the assets contributed by the founder to the value of the total assets of the family foundation will amount to PLN 75% and only in this part the benefits paid to the beneficiaries will be exempt from PIT. The remaining PLN 25% of the benefits paid will be subject to taxation at the rate of PLN 15% at the PIT rate.
Tax obligations of beneficiaries
**Tax obligations of beneficiaries** – The Foundation, as a payer, deducts the PIT tax and transfers it to the tax office, so the beneficiary already receives the net amount.
Tax benefits for beneficiaries
Thanks to the exemption for the founder's immediate family, a family foundation can be an attractive tool for succession planning and tax-efficient wealth management. This means that funds accumulated in the foundation can be transferred without tax burden to the immediate family.
Summary
The PIT tax in a family foundation mainly applies to beneficiaries outside the founder's immediate family. Thanks to preferential taxation rules, a family foundation is an attractive form of managing assets and their succession. However, it is worth remembering the need to properly plan the foundation structure and tax settlements in order to fully use its advantages. If you are considering establishing a family foundation or have questions about its taxation, contact our law firm - we will help you choose the best solutions for your situation.
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