Tax ruling on cryptocurrencies may affect family foundations

In a tax ruling dated 16 September 2024, ref. 0111-KDIB1-2.4010.340.2024.1.BD, it has been ruled that the income of a family foundation from the sale of cryptocurrencies is not exempt from corporate income tax but is taxed at a corporate income tax rate of 25%.

Story

A family foundation wanted to invest its assets in cryptocurrencies.The purpose of the investments would be to preserve and, above all, increase the value of the assets held by the foundation.

According to the Foundation, the acquisition of cryptocurrencies would not be motivated solely by their future resale. The Foundation has no minimum or maximum holding period for these assets, and the eventual sale would only result from the occurrence of fortuitous events, such as the asset reaching an expected level of appreciation.

The foundation asked the tax authorities whether the sale of the cryptocurrencies would be a permitted business activity that would generate income exempt from corporation tax. 

Finding of the tax authorities

The tax authorities disagreed with the foundation and ruled that the income from the sale of the cryptocurrencies should be taxed at 25% CIT.

This was because the main purpose of the acquisition of the assets was their future sale after the increase in value. The scope of the permitted activities of the family foundation explicitly excludes such situations.

Regardless of how long the Foundation holds such an asset, the income from its future disposal will be subject to 25% CIT. 

Potential issues for other family foundations

Both the rule and the tax ruling could effectively affect all (other than specifically excluded investments, such as securities) investments of a family foundation that assume capital appreciation. These may include foreign currencies, NFT tokens, precious metals and stones, art, vintage cars, real estate, etc.

It is important to remember that the primary purpose of a family foundation is to accumulate assets and manage them in the interests of its beneficiaries. Asset management, in our view, means protecting these assets from loss and preserving their value. A well-managed family foundation should be able to achieve this and even go further and multiply the assets entrusted to it.

What else does the law and tax ruling say?

In the case described, the Foundation explicitly stated that the main purpose of investing in cryptocurrencies was to increase its wealth as a result of the increase in their value.

The tax authority directly referred to the law. However, the situation could be different if the foundation’s assets were not acquired for disposal. The purpose behind the acquisition of certain assets by a family foundation is relevant. A family foundation might buy real estate to get rental income or use other assets to settle debts. Hence a tax ruling dated 23 July 2024 (0111-KDIB1-1.4010.351.2024.1.KM) states that foreign exchange income from a family foundation is exempt from tax if it is used to settle payments, not to make a profit.

Conclusions

This case deals with the rare issue of a family foundation acquiring cryptocurrency. Yet, it could have implications for other family foundations that have chosen to protect their assets through capital appreciation.

The founders and managers must choose asset protection methods carefully. MDDP has helped set up and manage many family foundations. Our experts are ready to share their experience.