In private client practice, commercial and residential real estate is one of the most common components of family wealth. The question whether a family foundation is a good vehicle to manage such assets, and whether the income generated by real estate is taxed, is one of the key issues in designing a succession structure. PLA.partners helps clients arrange a real estate portfolio within a family foundation in a tax efficient way.
Short answer, rental and lease are tax neutral within the foundation. But there are exceptions
A family foundation as a rule does not pay tax on income from rental or lease. Rental, lease and making property available on another basis fall within the limits of the so-called permitted activity of the family foundation, which means they are covered by the corporate income tax exemption.
Maciej Pilarek, attorney and partner at PLA.partners, points out that this parameter makes the family foundation particularly attractive for families holding commercial real estate that generates steady rental or lease income.
The exemption mechanism for rental and lease
The corporate income tax exemption for rental and lease results from the basic operating principle of the family foundation. The activity of making property available for use, in the form of rental, lease or on another basis, is expressly named among activities included in the catalogue of permitted activity of the family foundation. Income from these activities is thus tax neutral within the foundation.
In the practice of the PLA.partners team, this mechanism is one of the main arguments for placing commercial real estate within a family foundation. The rental income stream is gathered within the foundation without a current corporate income tax burden and may be reinvested in further assets or used to fund distributions to beneficiaries.
Short term rental, an important exception
Particular caution should be exercised with short term rental. In the assessment of the tax authority, short term rental does not fall within the scope of the so-called permitted business activity of the family foundation, with the result that income from such rental does not benefit from the exemption.
From the private client’s perspective this means that typical activity consisting in renting flats for a night or for short periods, conducted by a family foundation, may not be tax neutral. In projects conducted by PLA.partners this area is analysed each time, since the line between long term and short term rental has significant tax consequences within the family foundation.
A separate statutory exclusion is rental, lease or another agreement of similar character whose subject is an enterprise, an organised part of an enterprise or asset components serving to conduct business activity by a beneficiary, founder or an entity related to the family foundation, beneficiary or founder, where the size of the interest is at least 5%. Income from such agreements does not benefit from the tax exemption.
Lease and other forms of making property available
Lease, that is providing things for use and collection of fruits, falls within the catalogue of permitted activity of the family foundation. This is particularly important for agricultural real estate or asset components whose natural form of exploitation is lease. Likewise, making property available on another basis, that is on legal grounds other than rental or lease, is covered by this mechanism.
In private client practice this means that a wide range of mechanisms for making property available is tax neutral at the family foundation level, provided it does not go beyond permitted activity.
Legal and business consequences for the client
From the perspective of the business owner, the structure of rental and lease income within a family foundation means:
- no current CIT burden on rental and lease income within the foundation,
- the ability to accumulate capital from rents and reinvest it without tax,
- the risk of losing the exemption in the area of short term rental,
- the need to classify forms of making property available precisely,
- linkage of tax efficiency with the distribution policy for beneficiaries,
- the need to adjust the rental model to the family foundation regime.
Possible actions, a plan for the business owner
In the practice of the PLA.partners team, designing the rental portfolio within a family foundation involves:
- a map of properties and their current use,
- classification of each revenue source against the permitted activity catalogue,
- evaluation of short term rental and possible redesign of the rental model,
- shaping rental and lease agreements consistently with the family foundation,
- tax assessment of the current revenue stream,
- periodic review of the real estate portfolio in light of regulatory changes.
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.
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