In projects conducted by PLA.partners the question of taxation of distributions to beneficiaries returns in nearly every conversation about the family foundation. The answer is important not only for the beneficiary, but also for the founder designing the distribution policy. The tax rate that will burden a specific beneficiary depends on their kinship with the founder and on the structure of the foundation. PLA.partners helps private clients design the distribution policy so as to make maximum use of the available tax preferences.
Three tax rates, exemption (0%), 10% or 15%
Depending on the situation, distributions from a family foundation to a beneficiary who is a natural person may be subject to a rate of 10%, 15% or to exemption from tax. The choice of the applicable rate is not the beneficiary’s decision, it is the consequence of the family relationship and of the foundation’s structure.
Maciej Pilarek, attorney and partner at PLA.partners, emphasises that this multi-variant approach is one of the significant advantages of the family foundation. It allows the tax efficiency of distributions to be tailored to the actual family relationships, and in many cases to fully exempt distributions from tax.
10% rate, beneficiaries in tax group I or II
The 10% rate applies to distributions received by beneficiaries who are family members of the founder belonging to tax group I or II within the meaning of the inheritance and gift tax rules. This is a group covering, among others, descendants of siblings, siblings of parents and descendants of further descendants (tax group II), and from tax group I, persons not covered by the zero group exemption, such as the founder’s son-in-law, daughter-in-law and parents-in-law.
In the practice of the PLA.partners team this rate is often used for distributions to family that is broader than the closest, for example to the founder’s siblings or nieces and nephews. The tax mechanism then works preferentially compared to the 15% rate that applies to other beneficiaries who are natural persons.
15% rate, other beneficiaries who are natural persons
The 15% rate covers distributions received by other natural persons who are beneficiaries of the family foundation, that is persons outside tax groups I and II and outside the so-called zero group. It also applies to beneficiaries in tax group I or II, with respect to the part of the income that does not fall within the proportion of assets contributed by the relevant founder.
PLA.partners experts design the distribution policy so that as many distributions as possible reach beneficiaries covered by the preferential rate or exemption, while the application of the 15% rate is limited to justified cases.
0% rate, exemption for the zero group and the founder
Distributions from a family foundation may be subject to exemption from tax. The exemption covers beneficiaries who are persons from the so-called zero tax group and the founder themself. It applies to property received in connection with the dissolution of the family foundation and to distributions received during its operation.
In private client practice this means that beneficiaries closest to the founder, that is among others the spouse, descendants, ascendants, stepchild, siblings, stepfather or stepmother, may receive distributions from the family foundation without an income tax burden. This is one of the strongest tax arguments for the family foundation.
Multiple founders, the importance of the contribution proportion
In the case of a family foundation to which assets have been contributed by several founders or by an entity other than the founder, the preferential tax rate and the exemption apply only to the part of the income that corresponds to the proportion of assets contributed by the relevant founder in the total value of the foundation’s assets.
In projects conducted by PLA.partners this parameter is designed with particular care. The structure of asset contributions to the foundation directly affects the tax efficiency of future distributions. PLA.partners experts help arrange the order and scope of contributions so that family preferences are used to the widest possible extent.
Legal and business consequences for the client
From the decision-making perspective within the family, the taxation of distributions from the family foundation means:
- the possibility of tax exemption for the founder’s closest family,
- the preferential rate of 10% for wider family in tax group I or II,
- the standard rate of 15% for other beneficiaries,
- a significant impact of the founders’ structure on the tax efficiency of distributions,
- the need to carefully design the order of asset contributions,
- linkage of the distribution policy with family and tax preferences.
Possible actions, a plan for the business owner
In the work of the PLA.partners team, designing the distribution policy involves:
- a map of beneficiaries and their family relationships with the founder,
- analysis of tax groups and corresponding rates,
- design of a distribution policy using family preferences,
- schedule of asset contributions to the foundation taking proportions into account,
- tax assessment of future distributions,
- monitoring of the family situation and periodic updating of the distribution policy.
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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