Family Foundation and investing in shares and ETFs. What are the advantages and disadvantages?

The Family Foundation is an opportunity to effectively manage family assets, which also ensures better business and asset succession. Interestingly, this is an increasingly popular solution among Polish investors. However, there are certain nuances, as well as advantages and disadvantages, that you need to be aware of before you decide on this solution.

Poland has experienced dynamic economic development over the last several decades. It is no surprise that a lot of fortunes have been made since 1989, but now they are facing difficult times. Creators of dynamic businesses are approaching retirement age, and sometimes they have even left this world. Therefore, there is a problem of succession. Not everyone has the entrepreneurial flair. For this reason, there may be conflict within the family when dividing property. Some of the heirs will want to cash in on the business and "to enjoy life", others would prefer to continue developing the company or the entire family holding. The legislator met such expectations. In 2023, a new law appeared, which enables vocation Family Foundation (FR). Someone may ask:

“Why create a Family Foundation when you can establish a Foundation?”

Well, according to the Act, the FR has a number of advantages over a regular Foundation. It can also be a great instrument for family succession and... tax-optimized investing. In this article, we will briefly explain what a Family Foundation is and what benefits and threats it brings to investors.

Founder, beneficiary, management board, meeting of beneficiaries - it is worth knowing these terms

The Act on Family Foundations itself is not very long, as it is approximately 53 pages long. It is written in a language that is as simple as the law. It is here that we find out who can set up a foundation, what activities the foundation can conduct and what rights and obligations are granted to specific people associated with the RF. Already in article 2 we learn that:

“A family foundation is a legal entity established to collect property, manage it in the interests of the beneficiaries and provide benefits to the beneficiaries. The founder specifies the detailed purpose of the family foundation in the statute.

At the very beginning of the Act, names characteristic of foundations appear. It is about founder i beneficiaries. It is important that the property contributed to the foundation no longer belongs to the donors and founders, but to a separate legal entity. This is very important because it has a number of legal and tax consequences.

The Family Foundation is created by the founder or founders by contributing assets to it. These may be shares in companies, real estate, works of art, etc. It is the founders who decide what structure the foundation will have and who will benefit from the economic benefits of the RF. It plays a key role a statute that outlines the responsibilities and rights of the beneficiaries. We come to the second important expression, beneficiary. Let the excerpt from the act express who the beneficiary is:

“In the case of a beneficiary who is a natural person, a family foundation may in particular cover the costs of his/her maintenance or education (…)”.

The beneficiary therefore receives a benefit (cash or in kind) from the Family Foundation. However, the methods of payment and the conditions that the beneficiary must meet depend on the foundation's statute. Such conditions may be, for example: age, education, no financial obligations or linking benefits with taking up work.

A very important institution is the so-called meeting of beneficiaries, which may dismiss the Foundation's managers under certain conditions.

“Unless the statute provides otherwise, the appointment and dismissal of a member of the management board is made by the founder, and after the founder's death - by the supervisory board, if established. In the event of the founder's death and the absence of a supervisory board, the appointment and dismissal of a management board member is made by the meeting of beneficiaries. “

For this reason, it is always worth seeking advice from lawyers when creating the foundation's statute. This will help you avoid misunderstandings and legal problems in the future.

The meeting of beneficiaries also approves financial reports and decides on the distribution of financial results. It is worth remembering that the statute may grant selected beneficiaries a larger number of votes or exclude some from the right to vote during the beneficiaries' meeting.

Of course, we do not have space here to outline all the organs of the Russian Federation and to explain what the legislator had in mind in individual articles of the act. Therefore, we advise against opening a foundation yourself. It is much better to consult lawyers who will help you create a good statute that will protect both the founder and the beneficiaries.

What can a family foundation do?

The Family Foundation is exempt from corporate income tax on its activities. Only when benefits are paid to beneficiaries, the Family Foundation must pay 15% corporate income tax. However, the scope of activities performed is very limited.

Pursuant to the Act, the Russian Federation itself may conduct certain economic activities:

• disposal of property (unless it was acquired for further disposal),
• rental, lease (but not short-term rental),
• joining commercial companies, investment funds, cooperatives,
• purchasing and selling securities and derivatives,
• granting loans (under certain conditions),
• trading in foreign means of payment belonging to the family foundation in order to make payments related to the activities of the family foundation.

Therefore, the foundation itself may rent apartments, warehouses or other buildings, as well as lease land. However, he cannot trade kryptowalutami (tax free) or speculate on Forex market. Of course, if a limited liability company is established to trade on the currency market and the owner of such a company is the Russian Federation, the law will not be broken. The problem is that such a limited liability company will have to pay 19% corporate income tax. Therefore, establishing such a company in Russia is not very profitable.

Family Foundation as a vehicle for investing in the stock market

The Family Foundation can be an extremely profitable solution when investing in the stock market, but only if we do not withdraw funds from the investment account. Then the Foundation does not pay “Belka tax”. Let's imagine a situation in which an investor wants to buy bonds worth PLN 1 million that pay 10% interest and then reinvest the profits in subsequent bonds. Thanks to the Family Foundation, you can avoid 19% tax. Let's see what it will look like in 20 years. By allowing the assets to work in the Foundation, the investor received PLN 20 million after 6,7 years. For comparison, investing in a traditional way, the assets after two decades amounted to PLN 4,7 million.

Simulation of tax benefits when investing in bonds within the Family Foundation and "classically". Source: own study

This seems like a great solution, but it is also worth remembering the costs. The standard ones are related to accounting (expenses ranging from several hundred to over PLN 1 per month) and performing an audit (at least once every 4 years). Such an audit may cost from several to several thousand zlotys. In addition, remember about the 15% tax in the case of payment of benefits to beneficiaries.

Let's go back to the previous case. If we assume that the person wanted to withdraw all the funds from the foundation after 20 years, PLN 5,7 million was transferred to their account, which is PLN 1 million more than the "classic" payment every year. capital gains tax. FR will be great for using the w option covered call strategy, because you will not have to pay tax on your profits, which will improve the profitability of your option strategy. Also, the use of hedging transactions using e.g. futures contracts will be tax neutral.

Another advantage of FR is the possibility of paying dividends from limited liability companies or capital companies without having to pay capital gains tax. For example: an investor owns a restaurant in a limited liability company that generates PLN 1 million of gross profit. After paying the flat tax, PLN 810 remains in the company. If an investor would like to withdraw funds to his or her own brokerage account, he or she must pay a dividend, which will be subject to a 000% tax. As a result, from PLN 19 million of gross profit, PLN 1 will go to the investor's account. Now imagine that the limited liability company belongs to the Family Foundation. She earns PLN 656 million gross, i.e. PLN 100. PLN net. The funds are paid in the form of dividends to the Russian Federation. The Foundation does not pay capital gains tax on this amount. If FR continues to reinvest the funds as part of its activities, the 1% tax will be paid only when the funds are withdrawn (e.g. in a dozen or so years). Therefore, you can easily multiply your funds for many years on the stock market and benefit from compound interest. Even if the investor withdraws the above-mentioned PLN 810 from the Foundation as a beneficiary, he or she will pay 15% tax, not 810%. Therefore, the savings will amount to PLN 32.

Beware of double taxation on the stock exchange!

However, not all that glitters is gold. The Family Foundation fulfills its role as an investment vehicle if we do not pay out funds to beneficiaries. Let's use an example. There is investor A who has PLN 1 million and received a 10% dividend from an American company. He settles as an individual investor and took advantage of the opportunity to avoid double taxation. Dividend profits are used for consumption. In such a case, the investor will receive PLN 100 in the form of a dividend and pay PLN 000 tax in the US and an additional 15% capital gains tax in Poland. This means he will earn PLN 000 "purely". Now let's take investor B who, through FR, received PLN 4 in the form of a dividend from an American company and took advantage of the double taxation avoidance clause. He paid PLN 81 in tax, which means he earned PLN 000. However, if he wants to pay the said cash to himself, he will receive: PLN 100, the remaining amount (PLN 000) is the CIT that the Foundation must pay for transferring the funds to the beneficiaries. As you can see, in such a situation it is not profitable to invest using FR in listed companies whose capital gains tax rate will be over 15%.

Watch out for hidden profits!

The Family Foundation is subject to the Corporate Income Tax Act. There, in article 24q we will find the definition of what hidden profits are in FR. In this article, the legislator tried to reduce the risk of "creativity" of founders and beneficiaries. For this reason, if the Foundation pays the founder or beneficiary for services, e.g. legal, management or marketing must pay 15% CIT. Thanks to this, the tax office protects itself against excessive "draining" of the foundation without paying tax. Similarly, interest on a loan granted by the founder or beneficiary of the Russian Federation will also be taxed. It is also worth being careful when leasing cars to a foundation. If a management board member uses such a car for private purposes, he or she will pay tax for such a service.

We will also pay tax when we receive a donation from the Russian Federation or when the foundation sells us an apartment below the market price. For a good night's sleep, it is much better not to bend the law to the extreme. Otherwise, we can expect a tax audit.

Summary: is a foundation a good tool for an investor?

There can only be one answer: it depends.

If you do not have significant capital under management (around PLN 1-2 million) and you plan to regularly withdraw funds for your own life, FR may not be a good solution. This is due to high costs (minimum capital of PLN 100 will be consumed very quickly by accounting and audits) and the need to pay 000% of CIT by the foundation.

On the other hand If you are thinking about succession and do not want your family assets to fall into the wrong hands or be fragmented, FR is an interesting idea.. Another advantage is deferred tax, which can work like "IKE on steroids". As long as we do not withdraw the funds, we do not have to worry about taxes. Of course. we cannot avoid capital gains tax in foreign countries, so it is worth using or using ETFs accumulation, or choose countries where the dividend tax is low. However, if we do not pay out the funds, we will still benefit in the long term, despite paying 15% CIT.

It is worth remembering that when you contribute property to the foundation, you cease to be its owner. From now on, cash, real estate and companies contributed to the Russian Federation belong to the Family Foundation. It is worth remembering this because alimony obligations (e.g. the right to compulsory share) expire after 10 years. For this reason, when you construct your FR status incorrectly and you die unexpectedly, you may cause trouble for your heirs.

Brokers offering ETFs and stocks

More and more brokers have a wide range of shares and ETFs in their offer, which is an ideal place for long-term investments and wide diversification of assets within the Family Foundation. For example on XTB today we find over 400 ETFs and 3500 shares, almost 3000 ETFs and 19 shares in Saxo Bank and over 10 ETFs and as many as 000 shares in Exante.

Broker
Country	Poland	Denmark	Cyprus
Number of shares and ETFs on offer	approx. 400 - ETF approx. 170 - CFDs on ETFs approx. 3500 - shares approx. 2000 - CFDs on stocks 16 exchanges	3000 - ETF 675 - ETF CFDs 19 - shares 8 - CFDs on stocks 37 exchanges	10 – ETF 55 - shares 50 exchanges
Min. Deposit	PLN 0 (recommended min. PLN 2000 or USD 500, EUR)	0 PLN / 0 EUR / 0 USD	10 000 EUR
Tool	xStation	SaxoTrader Pro Saxo Trader Go	Exante platform
	REVIEW	REVIEW	REVIEW
	CREATE AN ACCOUNT	OPEN AN ACCOUNT	CREATE AN ACCOUNT

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. From 72% to 89% of retail investor accounts record monetary losses as a result of trading CFDs. Think about whether you understand how CFDs work and whether you can afford the high risk of losing your money.