Family foundation: A solution for succession?
It is no secret that Polish family-owned businesses struggle with the issue of succession. This has prompted the parliament to introduce a new institution, the family foundation. It is intended to allow for multi-generational succession and protect against the fragmentation of assets, while securing the means to support family members and others close to the founder.
Due to the great interest in this new institution, we will first present a few highlights, to be followed by details in future articles.
Founder
The founder of a family foundation is a natural person with full legal capacity, who makes a statement on establishment of a family foundation either in a founding deed or by will, in either case in the form of a notarial deed. Unless a family foundation is established in a will, it can have multiple founders, who need not be related.
The most important role of the founder is to establish the basic rules for managing the family assets, disposing of them, and paying benefits to beneficiaries. For this purpose, the founder will establish the charter of the family foundation (in the form of a notarial deed) and appoint the first bodies required by law or the charter: the management board, the beneficiaries’ assembly, and the supervisory board (mandatory if there are more than 25 beneficiaries).
Foundation assets
The assets of a family foundation will be property contributed by the founder, constituting the founding fund. Its value cannot be less than PLN 100,000, both at establishment of the family foundation and later during operation. Due to the family foundation’s limited ability to conduct business activity, it is to be expected that the most common assets will be real estate, shares in companies, securities, cash, and works of art.
With the contribution of assets to the family foundation, the founder will cease to be the owner of the assets (and they will no longer be inheritable). In principle, the return of contributed assets is not possible. The founder is also not liable for the obligations of the family foundation. On the other hand, a family foundation is jointly and severally liable for the founder’s obligations incurred before its establishment, and in some cases even after establishment (alimony and support obligations), up to the value of the property contributed by the founder.
Beneficiaries
As designated in the family foundation’s charter, a beneficiary is a natural person or a non-governmental organisation engaged in public benefit activities, entitled to benefit from the family foundation. Beneficiaries can be not only current and future family members, but also people unrelated to the founder, and even the founder himself. If necessary, the founder may stipulate that the list of beneficiaries is to remain confidential, even to other beneficiaries. According to the founder’s wish, a benefit from a family foundation may be granted either on condition or subject to a time limit, e.g. upon condition of graduation, marriage, or completion of a certain age.
The assembly of beneficiaries is one of the mandatory bodies of a family foundation. The body will be composed only of beneficiaries who are granted such authority in the charter. The Family Foundations Act identifies the issues that require a resolution of the assembly of beneficiaries, but the founder can expand these issues in the charter. In principle, the role of the assembly of beneficiaries is limited to adopting resolutions on matters strictly specified in the law or charter, which are mainly intended to guarantee the continuity of the family foundation’s activities (e.g. filling vacancies in the foundation’s bodies, approving financial statements, and selecting an auditor to examine the financial statements).
Audit
The act requires an audit at least once every four years of the management of the family foundation’s assets, incurrence and performance of obligations and public charges, for accuracy, reliability and compliance with the law and the purposes and documents of the family foundation. The audit team may include not only auditors, but also tax advisers, advocates or attorneys-at-law. In the case of a family foundation whose financial statements must be audited in accordance with the Accounting Act, the audit will be conducted more frequently, i.e. annually.
Taxation of foundations
A rather attractive taxation system is provided for the family foundation and its beneficiaries. Subject to a number of exceptions, a family foundation will be exempt from taxation so long as it does not make distributions to beneficiaries. Only a distribution will activate the tax obligation on the part of the foundation, with a tax of 15% of the amount distributed. At the same time, in the case of distributions to the founder and the founder’s immediate family (group zero), funds received will be exempt from taxation on the beneficiaries. For extended family (first and second groups) or non-family beneficiaries (third group), there will be a second level of taxation of 10% and 15%, respectively.
Due to its tax characteristics, in addition to being a vehicle for securing assets and succession, a family foundation will also be an interesting alternative to holding companies.
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It seems that the best predictor of the popularity of the new institution will be the number of applications for registration of family foundations. Starting from 22 May 2023, applications can be filed the registry court for foundations, i.e. the Piotrków Trybunalski Regional Court. This will be the first indication of whether the newly adopted solution is attractive to business owners facing a process of generational change.
As it is usually the case, seemingly simple slogans can turn out to be much more complex in the practical application of the new act. Is a solution for succession at hand? We will find out soon enough.
Aleksandra Drożdż, adwokat, Adam Strzelecki, M&A and Corporate practice, Wardyński & Partners
