Assets contributed to a family foundation include not only real estate but also shares, stocks, securities and sometimes valuable movables. During the foundation’s operation it is natural that some of these assets are disposed of, for the purpose of reinvestment, portfolio restructuring or fulfilling distributions to beneficiaries. The question of taxation of the sale of assets within a family foundation thus has an operational, not merely theoretical, character. PLA.partners advises private clients on how to dispose of assets within the foundation in a tax efficient way.
Short answer, asset sales within a family foundation usually without CIT
As a rule, a family foundation will not pay tax on the sale of assets, provided that the assets were not acquired solely for the purpose of further sale. The disposal of assets in itself falls within the catalogue of permitted activity of a family foundation, on condition that it does not concern assets acquired with the intent of further sale.
Maciej Pilarek, attorney and partner at PLA.partners, points out that this parameter reflects the logic of the family foundation as a vehicle for long term asset management, not short term trading in assets.
Border of the exemption, importance of intent at acquisition
The border of the exemption is analogous to the one applicable on the sale of real estate. If assets were acquired by the family foundation solely for the purpose of further sale, the income from sale does not benefit from the exemption. The concern is situations in which the foundation effectively conducts activity consisting in trading assets, that is buying them to sell them quickly.
In projects conducted by PLA.partners this parameter is analysed at the level of every asset acquisition by the foundation. PLA.partners experts help arrange the foundation’s investment policy so that acquisitions are coherent with its long term character.
Asset disposal within ordinary management
In the typical scenario the disposal of assets within a family foundation takes place within ordinary management of property. Sale of shares, stocks, securities or other assets held by the foundation for a longer time falls within permitted activity and remains tax neutral.
In private client practice this scenario is dominant. The foundation accumulates assets over a long horizon, and decisions on their sale are taken with reference to the investment strategy, not short term trading profits.
Reinvestment of proceeds from asset sale
Funds obtained from the sale of assets within a family foundation, under the conditions of the exemption, may be reinvested in full amount. The foundation may use them to acquire new assets or conduct another operation within the catalogue of permitted activity.
In the practice of the PLA.partners team, this mechanism is one of the significant arguments for placing a broad portfolio of assets within a family foundation. Each disposal transaction within ordinary management makes it possible to release capital in full amount, without current tax burden.
Legal and business consequences for the client
From the decision-making perspective within the family, the policy of disposing of assets within a family foundation means:
- tax neutrality of asset sale within ordinary management,
- the risk of losing the exemption in case of acquisitions with intent of further sale,
- the possibility of full reinvestment of proceeds from the sale,
- the need to document the character of the foundation’s activity,
- linkage of the disposal policy with the distribution policy for beneficiaries,
- the need for careful design of the foundation’s asset portfolio.
Possible actions, a plan for the business owner
In the work of the PLA.partners team, designing the policy of disposing of assets within a family foundation involves:
- a map of assets held by the foundation and expectations as to their fate,
- assessment of the character of each acquisition transaction against the intent criterion,
- design of an investment policy coherent with the family foundation regime,
- documenting ordinary management in the period preceding sale,
- tax assessment of planned disposals,
- a plan for reinvesting proceeds from asset sales.
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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