Spouses’ family foundation and PIT exemption – the tax authorities change their minds in favour of taxpayers

Not long ago, we informed about an unfavourable stance of the Director of the National Fiscal Information (KIS) on the rules of taxation of beneficiaries of a foundation established jointly by members of the closest family (e.g. spouses). The Director of KIS has a modified approach to the manner of determining the proportion of property contributed to the foundation, which has a direct bearing on the scope of tax exemption to which beneficiaries are entitled.

Troublesome proportion

Confusion was caused by the KIS Director’s interpretation of the provisions regarding calculation of the proportion of the value of property contributed to the family foundation.

Let us remind – for the purposes of PIT and the rules of taxation of beneficiaries stipulated therein, it is required to determine the proportion of the value of property contributed to the foundation by each of the founders or by the family foundation itself.

Property contributed to a family foundation by donation or inheritance by:

1) the founder or his/her spouse, descendants, ascendants or siblings – shall be deemed to have been contributed by the founder;

2) other persons – shall be deemed to be contributed by the family foundation.

When property is contributed to a family foundation by a joint descendant, ascendant or sibling of more than one founder, the property shall be deemed contributed by all such founders in equal shares.

A donation made to a family foundation by the founder’s spouse is treated as a donation made by the founder himself. This legal fiction should also apply if the founder’s spouse is also a founder himself. Unfortunately, the tax authorities have started to interpret the above-mentioned provisions differently.

Previous (unfavourable) interpretation practice

In individual interpretations of tax law, the Director of KIS took the position that property contributed to a family foundation by way of a donation or inheritance by the spouse, descendants, ascendants or siblings of a given founder can be deemed to have been contributed by that founder only if the spouse, descendants, ascendants or siblings contributing the property are not themselves founders of that foundation. This is because it was not possible, in the opinion of the tax authorities, to consider that each founder contributes property at the rate of 100%.

Why is the proportion so important?

The part of the income of a founder or a person close to the founder and a beneficiary who is a founder or a person close to the founder, corresponding to the aforementioned proportion as at the date of obtaining the income, is exempt from PIT.

When interpreting the provision on the manner of determining the proportion, the Head of the KIS started to assume that a co-founder, e.g. such as the spouse of the other founder, for tax purposes cannot be at the same time a person close to the other founder.

Consequently, the PIT exemption of income in the value of benefits received by the beneficiary funder would only be available in respect of the proportion of the property attributable to that funder. Income corresponding to the proportion attributable to the other funder (a close relative) would instead be subject to PIT.

As a result of this interpretation of the legislation, de facto ‘family’ foundations were becoming less favourable from a tax perspective than ‘individual’ foundations. Full PIT exemption for benefits from foundations established by several founders could never be applied.

Changing approach of the tax authorities

As part of the self-control carried out after receiving complaints against individual interpretations, the Director of  KIS verified the correctness of the interpretation of the provisions on calculation of proportions and proposed a changed approach.

An example is the individual interpretation of 25 June 2024 (0112-KDIL2-1.4011.113.2024.3.JK). The director of the KIS, amending this interpretation by way of self-control, indicated that a taxpayer who is a founder of a family foundation and at the same time a close family member for another founder, for the purpose of applying the income tax exemption, may add up the proportion of the value contributed to the family foundation by himself and by another close founder.

However, it is worth noting that not all ambiguities related to the calculation of the proportion have been resolved. For example, a problem with determining the proportion may arise in the situation of beneficiaries who are close to only one of the funders. In our opinion, there are arguments in favour of applying the same proportion for them as for the founder, however, this is an issue that has not been clearly resolved by the tax authorities so far.

Will a truly family foundation now be a good solution?

The change in the interpretation of the scope of the PIT exemption solves the problem, as it were, created by the tax authority itself. It is difficult to accept an interpretation of the regulations which puts the beneficiaries of a family foundation established jointly by the members of the closest family in a worse situation.

From this perspective, the change should be assessed positively.

The family foundation, as a relatively new instrument in the Polish legislation, is still associated with many ambiguities. The recently announced changes in the scope of taxation of these entities with income tax also cast a shadow over family foundations. It is therefore worth closely following the development of the practice of the tax authorities, at the same time bearing in mind that each case should be assessed individually.