The Ministry of Finance has proposed a draft amendment to the Corporate Income Tax Act that includes changes to how family foundations are taxed. The draft aims to restrict the scope of tax exemptions for income earned by family foundations. These changes are intended to prevent tax avoidance schemes using this entity, but the new rules could also affect existing foundations.

The end of some tax exemptions

The most crucial practical change is the introduction of a so-called lock-up, a 36-month period during which a family foundation should retain ownership of assets contributed to it free of charge or acquired from a related entity. If this period is not maintained, i.e., the foundation sells the assets before its expiration, the resulting income will be subject to income tax. In practice, this period will exceed three years, as it will be counted from the end of the calendar year in which the assets were contributed or acquired. This period is more extended than, for example, the one applicable under the Polish Holding Company regime.

Notably, the transitional provision clarifies that the described principle also applies to property contributed to or acquired by a family foundation from a related entity after August 31, 2025. This means that the lock-up will also cover the foundation’s property acquired by it before the amendment comes into force, which is scheduled for January 1, 2026. This solution raises certain doubts from the perspective of the protection of acquired rights.

The exemption will also not apply to income earned by a family foundation from a tenancy, lease, or similar agreement involving a residential building, a mixed-use building (in the residential part), a residential unit, or parts of either, unless they are rented directly by the family foundation solely for residential purposes. This aims to limit tax benefits for income from short-term rentals. The family foundation must demonstrate that the building, unit, or part is rented directly and solely for residential purposes.Family foundations’ income from participation in tax-transparent entities, such as certain partnerships or foreign investment funds, will also be taxed. The question remains whether the restrictions will also apply to income from investments in open-end investment funds. The justification for the bill states that this is not the Ministry of Finance’s intention, but the wording of the provision allows for such an interpretation, which could negatively impact the Polish capital market.

Expanding the catalog of hidden profits

The draft amendment also broadens the catalog of hidden profits subject to a 15% tax rate for family foundations. Loans made to the founder, or an individual associated with the beneficiary, founder, or family foundation, will be considered hidden profits. This includes any portion that was repayable in a specific tax year and not repaid by the tax return deadline for that year, as well as loans granted for at least 10 years. Currently, such cases are classified as hidden profits only if the loan was given to a foundation beneficiary.

The hidden profit also includes the value of receivables that are written off, time-barred, or considered uncollectible receivables from a loan provided by a family foundation to a beneficiary, founder, or a natural person who is an entity related to the beneficiary, founder, or family foundation.

The proposed changes aim to tighten the rules. The current regulations, meant to stop family foundations from granting loans on non-market terms, had loopholes that allowed tax optimization. However, the draft law does not include transitional provisions in this area, which could raise doubts about how these changes will be applied.

New tax obligations

The draft amendment introduces taxation on income from a foreign entity controlled by a family foundation. This change could greatly affect how foundations’ investments in foreign entities perform.

Family foundations will also be subject to tax on income from unrealized profits (so-called exit tax). This will lead to taxation of the transfer of assets or the tax residence of the foundation to another jurisdiction.

The legislative proposals aim to support the core function of family foundations, which is to facilitate intergenerational succession, while also restricting opportunities for optimization. However, the provisions raise numerous concerns that could greatly diminish interest in family foundations among Polish entrepreneurs.

Consultations on the draft law presented are currently in progress.