The question of taxation of dividends received by a family foundation appears in nearly every project in which a foundation is planned as the shareholder of an operating company. The answer is strategically significant, since it affects the tax efficiency of the entire family structure. PLA.partners advises private clients on how to arrange dividend flows between companies and the family foundation in order to make maximum use of the available tax preferences.
Short answer, the family foundation does not pay tax on dividends
A family foundation does not pay tax on dividends received from domestic subsidiaries. This follows from the basic feature of the family foundation, namely the exemption from corporate income tax within the scope of permitted business activity. This activity includes joining commercial companies and participating in them, that is also receiving dividends.
Maciej Pilarek, attorney and partner at PLA.partners, emphasises that this feature makes the family foundation an exceptionally attractive vehicle for holding shares in capital companies that form part of the private client’s business assets.
The exemption mechanism, why the foundation does not pay CIT on dividends
Family foundations benefit from a subjective exemption from corporate income tax within the scope of permitted activity. Permitted activity includes joining and participating in commercial companies. Dividends are the natural result of such participation, so they fall within the scope of the exemption.
In the practice of the PLA.partners team, this mechanism allows structures to be designed in which an operating company runs active business, and the profits generated are paid out as dividend to the family foundation, where they are subject to exemption and can be reinvested within the foundation without current tax burden.
Foreign dividends, points requiring particular attention
Particular caution should be exercised in the case of dividends paid by subsidiaries seated in a state other than Poland. The mere fact of holding shares in foreign companies by the family foundation still falls within the catalogue of permitted activity under Polish law. The regulations of the state of the dividend source, however, may provide for a withholding tax on the dividend paid.
In private client practice this means that the foreign dividend may be reduced by withholding tax before reaching the family foundation. PLA.partners experts analyse this issue in relation to the specific state of the subsidiary’s seat and the specific rules of international settlements.
Tax-transparent foreign companies, the 25% risk
A particular tax risk is connected with the family foundation’s interests in foreign tax-transparent companies. According to the current position presented by the domestic tax administration, holding such interests may not fall within the catalogue of permitted activity, which results in dividend income from such companies being excluded from the scope of the exemption. In consequence, such income may be subject to income tax at the rate of 25%.
In projects run by PLA.partners, this area requires careful evaluation of each investment structure of the family foundation. Including a foreign tax-transparent company in the foundation’s structure requires a conscious decision and acceptance of the potential tax risk.
Legal and business consequences for the client
From the perspective of the business owner, the family foundation’s dividend structure means:
- no CIT burden on domestic dividends received by the foundation,
- the ability to accumulate and reinvest business profits in the foundation without current tax,
- the need to take into account withholding tax in the seat state of a foreign company,
- the risk of applying the 25% rate to foreign tax-transparent companies,
- the influence of the dividend structure on the taxation of distributions to beneficiaries,
- the need for continuous review of current positions of tax authorities.
Possible actions, a plan for the business owner
In the practice of the PLA.partners team, designing the family foundation’s dividend structure involves:
- a map of domestic and foreign companies planned for contribution to the foundation,
- assessment of each company’s classification under the permitted activity criteria,
- assessment of the withholding tax risk in the seat state of a foreign company,
- analysis of foreign companies in terms of their tax transparency,
- design of a dividend policy taking tax efficiency into account,
- periodic verification of the structure against positions of tax authorities.
Contact PLA.partners Law Firm
Do you need legal support or an individual analysis of your matter? Visit PLA.partners and contact our team, we will help assess the situation and propose specific solutions.
About the author
