Family foundations under scrutiny by the Ministry of Finance
The Ministry of Finance has published a draft amendment to the tax regulations governing family foundations (UD447). The draft undoubtedly aligns with the ministry’s stated goal of tightening the system and limiting the use of family foundations for purposes other than succession.
The Ministry explicitly states that the bill is a response to identified mechanisms of using family foundations inconsistently with the purpose of the Act. The justification for the bill explicitly states that ” there have been observed cases of family foundations being used as instruments enabling tax benefits by changing the legal form of business while maintaining the economic identity of the income generated.”
The project includes both tightening solutions and several changes beneficial to taxpayers. Below are the most important proposals.
- Higher taxation of payments from a family foundation
One of the most significant changes is the increase in the corporate income tax rate on benefits paid to beneficiaries, hidden profits, and assets received in connection with the dissolution of a family foundation. The tax rate will increase from 15% to 19%.
This means a reduction in the tax efficiency of family foundations, especially in the case of structures whose purpose is to accumulate and then distribute wealth to beneficiaries.
- Return of the “lock-up” rule for assets
The bill introduces a 36-month holding period for certain assets in a family foundation. If the foundation sells assets contributed by the founder, received free of charge, or acquired from related entities before 36 months have passed since the end of the year in which they were contributed to the foundation, preferential tax treatment will no longer apply.
At the same time, an important transitional provision has been provided for: the new rules will apply only to assets contributed to the foundation after 31 December 2026.
- The end of preferences for tax-transparent structures
The Ministry plans to exclude the possibility of using the CIT exemption by family foundations generating income through tax-transparent entities, including primarily companies that are not legal persons.
The proposed change is a response to the observed practice of locating operational activities outside the family foundation itself, while simultaneously maintaining the tax benefits provided to foundations. Currently, foundations can participate in structures utilizing tax-transparent entities through which actual business activity is conducted. In the Ministry’s opinion, this leads to a situation in which the preferential tax regime intended for entities managing family assets is used for activities that go beyond the foundation’s succession objective.
- Real estate rental under the microscope
The bill clarifies the taxation rules for income from real estate rentals. The tax exemption is intended to cover only situations where a foundation rents residential properties directly to individuals for their residential purposes.
In practice, this means taxation not only for short-term rentals, but also for a range of rental models implemented indirectly or commercially. The Ministry wants to clearly eliminate any doubts regarding the eligibility for the exemption in such cases.
- Family foundations covered by CFC and exit tax regulations
Another significant change is the inclusion of family foundations in the Controlled Foreign Entity (CFC) and exit tax regulations. This marks a departure from the current exemption for family foundations from these regulations.
The change may be of particular importance to foundations with foreign assets or structures.
- More “hidden profits”
The bill significantly expands the list of events considered hidden profits. Specifically, it will address:
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- loans granted to the founder or related entities,
- written off receivables from the founder, beneficiaries and related entities,
- receivables that have become time-barred.
In practice, this means further limiting the possibility of transferring economic values from foundations to related persons without ongoing taxation.
- Possibility of neutral withdrawal of part of the assets
It is also possible to withdraw certain real estate and selected property rights that were previously contributed to a family foundation in a tax-neutral manner by the end of 2027.
What do the proposed changes mean?
The Ministry of Finance’s proposals send a clear message that family foundations should be viewed primarily as a succession tool, not a tax planning tool. The most significant changes likely to have the greatest practical impact include an increase in the tax rate from 15% to 19%, the introduction of a 36-month asset holding period, and restrictions on the use of tax-transparent entities.
At this stage, this is only a draft, but business owners and founders should now analyze the impact of the proposed changes on existing and planned succession structures. In particular, it is worth reviewing planned asset contributions to the foundation and future asset sales transactions.
