Is establishing a family foundation worthwhile for everyone?

A foundation does not have an owner but rather founders and beneficiaries. The assets belong to the foundation, not to a private person, which protects the founder in case of debt — authorities cannot seize the foundation’s property. Establishing a family foundation can also bring tax savings, as reinvesting capital is tax-free. However, does that make it a perfect solution for everyone? The answer is — no.

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Who and when does a family foundation benefit?

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A family foundation is most advantageous when the founder intends to reinvest accumulated assets (e.g., in real estate, stocks, or company shares) rather than consume them on an ongoing basis. Capital turnover itself does not create a tax obligation, so one can buy and sell shares, rent out apartments, and pay no tax until funds are distributed to the founder or beneficiaries.

For smaller capital, this solution may be less beneficial, as the costs of maintaining the foundation could consume a significant portion of profits. It is most profitable for individuals whose assets are counted in millions rather than hundreds of thousands. In addition to having enough funds for investments, one must also maintain liquidity for daily obligations.

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‍What can a family foundation do?

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A family foundation can engage only in specific activities, such as: buying and selling shares or securities, earning profits from dividends, leasing and renting property, joining companies, selling assets (if not considered flipping), and granting loans to beneficiaries. Activities beyond this scope trigger a punitive 25% corporate income tax (CIT) on total income. Questionable activities include cryptocurrency, gold, or art trading — ownership is allowed, but active trading is often challenged. Therefore, before taking any action, it’s important to verify whether it complies with the family foundation cct.

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How is a family foundation taxed?

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One of the main advantages of a family foundation is its favorable tax regime. The 15% CIT is only applied when benefits are distributed to beneficiaries, similar to the Estonian CIT model. It’s worth noting that the founder and their close family are completely exempt from personal income tax (PIT) on payouts, meaning there is no double taxation. For them, taxation ends at the 15% CIT — which is very favorable.

For unrelated or distant relatives, an additional 15% PIT applies. This allows the founder to grow wealth tax-free during reinvestment and pay taxes only when withdrawing funds, at a time and amount of their choosing. The taxation model also integrates well with limited liability companies (sp. z o.o.).

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What to watch out for

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One major concern is hidden profits — benefits provided directly or indirectly to individuals connected with the foundation that are not allowed under the Family Foundation Act. Examples include interest, commissions, or fees for advisory, legal, accounting, or marketing services provided by the founder or beneficiaries to the foundation.

Another form of hidden profit is using foundation property for private purposes without paying rent — for example, living in a foundation-owned property or using its car without a lease agreement and market-based payment. This means that if you transfer your private apartment to the foundation and live there, you must pay the foundation rent at market value.

Also, loans that are never repaid are considered hidden profits. The maximum repayment period is 10 years; exceeding it can result in tax penalties.

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Costs of establishing and running a foundation

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Running a family foundation comes with expenses, making it suitable primarily for wealthy individuals. The initial founding capital is at least PLN 100,000, followed by registration court fees (around PLN 500), notary fees for the founding act and statute, ongoing accounting costs, and mandatory financial audits at least once every four years. Although the financial outlay is significant, for many people the benefits clearly outweigh the costs.

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The founder, beneficiaries, benefits, and inheritance rules

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Only a natural person with full legal capacity may establish a family foundation. The founder defines the foundation’s statute, specifying its name, seat, purpose, beneficiaries, and operating rules. Beneficiaries may include individuals or public benefit organizations (OPPs) listed in the statute. They receive benefits or assets upon the foundation’s dissolution. They do not have to be related to the founder, and the founder may also be a beneficiary.

Benefits may include cash, property, rights, or coverage of living or educational expenses. Payments can also be conditional — for example, upon reaching a certain age or getting married. This allows the founder’s wishes to remain in effect even after their death. The founder’s private estate can also be inherited by the foundation, preventing asset fragmentation and ensuring controlled distribution according to the statute.

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Companies, estonian CIT, and the family foundation

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A family foundation and the Estonian CIT system share similarities but serve different purposes. A family foundation primarily allows reinvesting capital gains tax-free, whereas the Estonian CIT defers tax on company profits. A foundation cannot conduct standard operational business (like running a store), while companies can.

In a company, profits are double-taxed (CIT + PIT on dividends), whereas in a foundation, distributions to the founder and close family are PIT-exempt — only the 15% CIT applies. However, companies taxed under the Estonian CIT lose this benefit if transferred to a foundation.

Combining a company with a foundation can significantly reduce the tax burden. Normally, a company pays 9% or 19% CIT, then the shareholder pays 19% PIT on dividends. With a family foundation, the company pays CIT (9% / 19%), distributes dividends tax-free to the foundation, and then the foundation pays only 15% CIT when distributing benefits to the founder or beneficiaries.

In short:

- without a foundation: 9% / 19% CIT and 19% PIT,

- with a foundation: 9% /1 9% CIT and 15% CIT.

Another advantage is exemption from the solidarity levy — for example, selling company shares worth PLN 1 million through the foundation incurs no 19% PIT and no solidarity surcharge.

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If you are considering establishing a family foundation and are unsure how to handle all the formalities — contact us. As an experienced accounting firm, we will guide you through the entire process, choose the most tax-efficient structure, and take care of your accounting needs.

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