The family foundation has become one of the most recognisable instruments of tax planning for owners of private companies. From the perspective of a strategic client, however, it is not solely about a lower tax, but about a new structure of tax exposure, in which assets can be accumulated in a more efficient environment, and distributions to family members are subject to preferences adjusted to family relationships. PLA.partners designs family foundations so that the tax advantages translate into a measurable business effect.
CIT exemption, the basic tax advantage of a family foundation
A family foundation is, as a rule, exempt from corporate income tax. This exemption is of a subjective character and allows the foundation to accumulate profit without current tax burden. The condition for benefiting from this exemption is, however, conducting activity within the so-called permitted business activity.
Maciej Pilarek, attorney and partner at PLA.partners, points out that this mechanism changes the efficiency of compounding assets. In a classical company, profit is taxed on an ongoing basis, and only after taxation is paid further. In a family foundation, profit is accumulated under the exemption, and taxation appears only on the payment of distributions.
Permitted business activity of the family foundation
The scope of activity covered by the exemption has been precisely defined and includes, among others:
- disposal of property, provided that the property was not acquired solely for the purpose of further sale,
- lease, tenancy or making property available for use on another basis,
- joining commercial companies, investment funds, cooperatives and similar entities, both domestic and foreign, and participating in them,
- acquiring and disposing of securities, derivatives and rights of a similar character,
- granting loans to capital companies in which the foundation holds shares or stocks, to partnerships in which the foundation participates as a partner, and to beneficiaries,
- trading in foreign means of payment belonging to the family foundation for the purpose of carrying out its activity,
- production of plant and animal products processed in a manner other than industrial under defined conditions,
- forestry.
Any activity going beyond this catalogue creates tax risk, therefore PLA.partners experts design the foundation’s business model with care and precision.
Capital accumulation in the family foundation. How the tax effect works?
The subjective exemption means that a family foundation may accumulate profit and reinvest it within the permitted activity without current taxation. From the business owner’s perspective this means greater efficiency in compounding assets over the long horizon.
In private client practice, the family foundation becomes an investment platform in which business profits can be reinvested in real estate, securities or shares in other companies without losing a significant part of value to the current tax burden.
Taxation of distributions to beneficiaries
Taxation appears only when distributions are paid to beneficiaries. Depending on the family relationship between the beneficiary and the founder, different rates may apply, and in defined cases the distributions are subject to exemption.
In the practice of the PLA.partners team, the distribution policy is designed with the tax effect in mind, so that family preferences are used in a way consistent with law and at the same time beneficial for the client. This is a significant element of the family’s strategy, since the rhythm of distributions affects total tax burden.
Dividends, lease and other typical revenue streams of a family foundation
In practice, a family foundation generates revenues from dividends, lease, sale of real estate, sale of shares and other operations within the permitted activity. Most of these streams fall within the scope of the exemption, thanks to which the family foundation becomes a tax efficient environment for business assets.
PLA.partners experts advise how to design the foundation’s revenue streams so that they make maximum use of the tax exemption while also accounting for specific exceptions, for example regarding short term rental or the sale of property acquired with the intention of further sale.
Legal and business consequences for the client
From the perspective of the business owner, board member and CFO, the tax advantages of a family foundation translate into:
- acceleration of capital accumulation over a long horizon,
- shifting the tax effect from current asset growth to the moment of distributions,
- orderly taxation of distributions to beneficiaries,
- the possibility of using preferential rates or exemption in family variants,
- a new logic for investing the company’s financial surpluses,
- the need for precise qualification of activity within the permitted scope.
Possible actions, a plan for the business owner
In the practice of the PLA.partners team, maximising the tax benefits of a family foundation involves:
- a map of the foundation’s planned revenue streams,
- assessment of each planned activity in relation to permitted activity,
- design of a distribution policy taking into account family preferences,
- schedule of asset contributions coherent with the foundation’s investment goals,
- tax and reporting servicing model for the foundation,
- periodic review of the foundation’s activity in light of changes in the family situation.
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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