Does the private foundation or trust qualify for the tax-exempt status under Polish law?
Under Polish inheritance and donations tax law, a private foundation or a trust could be tax efficient if the Polish beneficiary fulfills some requirements.
Even though Polish legal system does not know the institution of a private foundation whose purpose is to manage assets to the benefit of private individuals, or the institution of trusts, it is possible to use either of them to avoid the tax on inheritance and donations on the part of a Polish beneficiary if he changes his tax residence into the place at which the funds received are exempt from taxation.
The inheritance and donations tax is regulated by the Polish Law on Inheritance and Donation Tax dated July 28, 1983 (consolidated text: Journal of Laws of 2009 No 93, item. 768 as amended).
According to the above-mentioned Law, the acquisition of property located within the territory of Poland or of property rights exercised within the territory of Poland is subject to the inheritance and donations tax if such acquisition results from:
- inheritance, normal provision, latter provision, specific bequest, testamentary mandate;
- donation, benefactor’s mandate;
- annulment of joint ownership without consideration;
- compulsory portion of inheritance, if an eligible heir has not received it as a donation made by the bequeather, or in a way of succession, or provision;
- allowance, usufruct or easement without consideration
An acquisition of property located abroad or of property rights exercised abroad is subject to taxation if the acquiring party is a Polish citizen or has a permanent place of residence within the territory of Poland at the moment the inheritance is opened or a deed of donation is entered into.
As a rule, the taxation basis is the value of acquired property and of property rights, after deduction of debts and burdens, determined according to the status of the property or of the property rights on the acquisition day, and the market prices of the day the tax obligation arises. If there is a property damage caused by force majeure prior to the income tax assessment, the assessment shall be made on the basis of the property condition as on the day the assessment is carried out, the insurance compensation for the damage being included in the assessment base.
The applicable tax free-amounts and tax rates depend upon the allocation of the beneficiaries to one of the respective “tax groups”, as defined below.
Tax groups, as set forth by the Polish Law on Inheritance and Donation Tax Law:
- spouse, descendants, ascendants, stepchildren, son-in-law, daughter-in-law, step parents, parents-in-law;
- 2nd Group – the siblings’ descendants, the parent’s siblings, the stepchildren’s descendants and spouses, the siblings and siblings of spouses’ spouses, the spouse’s siblings’ spouses, other descendants’ spouses;
- 3rd Group – other acquiring parties, including unrelated parties.
An acquisition of property or of property rights by a spouse, descendants, ascendants, stepchildren, siblings, or parent-in-law, step parents (i.e. persons from the “1st tax group”, defined in detail below) is tax free, provided that:
- the beneficiaries have reported the acquisition to the competent head of tax office within 6 months since the day the tax obligation has arisen, and especially in the case of acquisition by succession within the period of 6 months following the date at which the court decision stating the acquisition of inheritance became binding, and
- in cases where the subject of acquisition from donation or upon donor’s instruction is money, and where the total value of the property acquired from the same person during the period of 5 years which precede the year of the most recent acquisition added to the value of the property and to the value of the property rights most recently acquired exceeds the respective tax-free amount, the beneficiaries evidenced the acquisition thereof with a proof of transfer to the acquiring party’s bank account or the acquiring party’s account kept by a savings and credit institution, or via postal order.
The above-mentioned obligation to report does not involve cases in which:
- the total value of the property acquired from that person or inherited from that person during the past 5 years since the year of the last acquisition added to the value of the property and of the property rights acquired on the last order does not exceed the respective tax-free amount, or
- the acquisition takes place on the basis of an agreement executed in the form of a notarial deed.
An acquisition of property and of property rights from one person is subject to taxation where the agreed value thereof exceeds:
- PLN 9,637 – if the acquiring party is a person from the “1st tax group” (defined below);
- PLN 7,276 – if the acquiring party is a person from the “2nd tax group” (defined below);
- PLN 4,902 – if the acquiring party is a person from the “3rd tax group” (defined below); * 1
The excess amount constitutes the basis for the calculation of:
|Excess amount in PLN:||Amount of tax due in PLN:|
|1) from the acquiring parties belonging to the “1st tax group”|
|up to 10,278||3%|
|over 10,278||up to 20,556||308.30 and 5% of the amount exceeding PLN 10,278|
|over 20,556||822.20 and 7% of the amount exceeding PLN 20,556|
|2) from the acquiring parties belonging to the “2nd tax group”|
|up to 10,278||7%|
|over 10,278||up to 20,556||719.50 and 9% of the amount exceeding PLN 10,278|
|20,556||1,644.50 and 12% of the amount exceeding PLN 20,556|
|3) from the acquiring parties belonging to the 3rd tax group”|
|up to 10,278||12%|
|over 10,278||up to 20,556||1,233.40 and 16% of the amount exceeding PLN 10,278|
|over 20,556||2,877.90 and 20% of the amount exceeding PLN 20,556|
Trusts and private foundations have been lately among those most desirable remedies against increasing taxation all over the world. It seems that the above-said institutions are the best legal options to avoid the uncomfortable burden. However, regarding Polish taxation reality, those legal options may only by profitable if a taxpayer changes his/her residence in order to decrease the tax obligations. When it comes to making a decision, for example, Switzerland is an excellent jurisdiction of choice not only because it is generally considered to be a tax-friendly country but also due to its political stability and the various tax exemptions or reductions available.
A trust – a common law institution derived from the Middle Ages feudal system is a type of a tax entity created by an individual person, legal person or organisational unit without legal personality to protect or to preserve the assets, and to distribute income to beneficiaries. Trusts are created primarily either by means of trust clauses in a will, the so-called testamentary trust, or a written agreement between the founder and the trustees during the founder’s lifetime (inter vivos trust) to manage the assets with the necessary care, to the benefit of the trust beneficiaries. A trust seller (founder of trust) transfers assets to a selected trustee, which means that from the date of transfer on, due to the settlement, the trustee is responsible for managing the trust and is obliged to transfer profits to beneficiaries of any kind including the founder of the particular trust. Trusts encompass all types of estate – money, properties, tangible and intangible assets. Trusts are created not only as a strategy of estate protection from creditors but also for international financial planning and preserving the beneficiaries privacy as well as for concealing assets and protecting heirs one from another.
Private interest foundation
A private foundation has nearly nothing do with its Polish definition. According to Polish law, private foundation may only be established to pillar upstanding goals, subordinate to public administration rather than the founder. A private interest foundation based on European civil law jurisdictions, is an interesting alternative to trusts. The private interest foundation registered as a legal personality could be defined as a legal entity, formally constituted, to acquire a patrimony that should be managed and protected in accordance with the will of the founder. Private interest foundations are established mainly in Lichtenstein, Panama and Austria and The Netherlands. The foundation has beneficiaries who are ultimately entitled to the assets and income of the foundation. The creator of the foundation is allowed to steer the foundation by being appointed as a financial adviser or protector2. A private interest foundation is considered to be a very interesting finance-managing tool due to:
- favoured inheritance taxation,
- profitable taxation of future gains from existing firms.
A contribution to the foundation does not mean that any shares or stocks will be accomplished. Therefore, all privileges are purely personal and neither the founder nor beneficiaries are submitted to execution.
The major difference between a foundation and a trust is that in the case of a foundation the legal owner of the foundation’s assets is the foundation itself, a separate legal entity (usually) based in a nil tax jurisdiction. This is different to the situation of a trust where the underling owners of trust assets are the (presently entitled) beneficiaries, which causes a significant impact in terms of tax liability.
It is important to note that the establishing of a foreign (i.e. non-Polish) private interest foundation is not beneficial to Polish residents from a purely tax perspective, as any benefits paid out to the Polish resident would be qualified as a benefit obtained from an unrelated party, thus falling into the 3rd tax group, mentioned above. As a result, any payment from such source would fall under the progressive taxation, reaching up to 20%. However, such a foreign private interest foundation may be used if other, non-tax-related considerations are of prime importance for the interested parties, or of the future beneficiaries would consider change of their tax residence prior to obtaining of any payments.
Lump sum taxation
As already mentioned, trusts and private interest foundations may only be profitable to Polish taxpayers considering future change of their tax residence. The noticeable solutions in tax optimization for individuals with high income is a lump-sum taxation regime in Switzerland, which may be chosen instead of the normal progressive income tax. Foreigners with absence of more than 10 years or who take up residence in Switzerland for the very first time, and do not carry out any profitable activity in this country, will be deemed eligible to taxation under this special regime, also called forfait fiscal (French) or Pauschalbesteuerung (German). Several Swiss cantons have unofficial minimums fixed for the taxable income before they grant particular residence, which as a rule, is not less than CHF 150,000 a year to be eligible. As part of the fiscal arrangement between the taxpayer and authorities of the taxpayer’s residing canton, particular taxpayers indicate the costs of living expenses and then individually negotiate the amount of tax to be paid. However, it is common that the tax amount is usually the quintuple of the annual housing rent value paid by the taxpayer. Moreover, the advantage of the lump sum taxation is that there is no obligation to disclose the actual amount of income or the value of property owned by such a taxpayer to the Swiss fiscal authorities. Since the Swiss legislation imposes limitation to minimum tax amount, the attractiveness of the lump sum taxation might be appreciated by taxpayers receiving high income from non-Swiss sources.