Good to invest in the family

Where did the idea for family foundations come from and can you explain in basic terms how they work?

Michał Kwaśniewski, a partner of tax consultancy Quidea: These types of foundations are common in other countries, such as Liechtenstein, Austria, the Netherlands and Malta, and are intended to be used by people who have set up businesses but are retiring or want to stop what they are doing and pass their company onto someone else while protecting their own wealth. Up until now, there was no tool in existence in Poland for doing this. Of course, there have always been legal bequests and inheritance, but these options are not always sufficient. After all, we can never be sure that our children will want to run the family company and, of course, not everyone has the talent to do this. The wealth passed on through a family foundation can include such property as material and non-material goods or legal property of value, such as stocks and shares in an investment fund, including real estate funds, or certificates of value and financial instruments. It can also include real estate and it doesn’t have to involve splitting up the shares in this among different individuals or institutions. A family foundation, when it comes to the real estate market, is the closest thing to a REIT or an investment fund. It is designed to act as an umbrella under which your wealth will be kept safe.

What are the tax implications of putting real estate in a family foundation?

Putting your property into such a foundation initially has no taxable consequences, which also allows the multiplier effect to be brought into play. In other words, a family foundation is a private foundation – there is no requirement that those entitled to payments from the foundation should be related to the owners of specific shares, although the lack of any relationship will affect the taxation of any possible payments. Those who establish the foundation lay down in its statutes what will happen to their wealth after their death or when they retire from their businesses. Traditionally, foundations are charities, and family foundations can support worthy causes – but that’s not their primary purpose.

What has the situation been since the law was passed governing family foundations in Poland?

The law has been in force for about a year as the act came into effect last May. Since then, about 700 foundations have been registered and over 1,000 applications have been made. This has exceeded all expectations, as around 300 were expected within the first year of the law being passed.

Who might be interested in setting up a family foundation?

The type of individual most likely to feel that a private foundation is a useful option would be the head of a family firm. After that, it could be an executive, such as a so-called ‘business angel’, who has managed to accumulate wealth but is at risk of losing it. A foundation can provide some security in these cases. And it could also be a good option for individual investors and the founders of start-ups.

What kind of real estate can be put into a family foundation?

Any, in theory – except for some kinds of farmland. Generally, it will be rental apartments, offices, warehouses and quite often retail parks. Theoretically, you could even include a mall, but I’ve not yet come across such a case. Real estate is sometimes included straight away when it’s connected to the business, and sometimes it’s only when the business is over that the decision is taken to invest in real estate. In such cases, the real estate can be an apartment or commercial premises or even a building with land attached to it where a development is planned. You can even put a real estate company into such a foundation, whether it’s Polish or not, as well as shares in real estate investment funds.

But in that case, what kind of business can’t be put into such a foundation?

The important thing is that the business isn’t risky, which is why you cannot, for example, put a manufacturing plant into such a foundation. We are able to include long-term and short-term leases, but these are currently controversial in the case of hotels – that is, short-term leases – and in mixed businesses. This field has not yet been regulated or tested, since the laws covering them are still new. An option worth considering is using an operator to whom you lease out your building long-term while they run a short-term or mixed business within it.

Will the interest in family foundations continue to remain so high?

Right now, I have the impression that not everyone who might make use of a family foundation has looked into the opportunities they provide properly. In my opinion, potential investors who are at the moment on the starting blocks are often concerned about possible changes in the law. The current conditions for setting up a foundation are extremely favourable, but there’s still no certainty over how costly it might be to get out of them. The first wave could turn out to be the largest one, but who knows? Our law-makers have already changed the rules governing foundations twice, and even though from the tax perspective the new rules are justified because they prevent possible abuses, this lack of stability might make potential investors even more cautious. There are some people who want to wait and see how such an instrument works instead of finding this out at their own cost. I hope that these fears turn out to have been overblown and the niggles will all be worked out, and so more family foundations will be set up. I’m hoping for this for both those who set up foundations in the future and for the wider real estate market, which could benefit from the eventual investment by such foundations. But when it comes to REITs, we may still have to wait a bit longer.

Interview: Julia Cudowska