Scope of the CFC regulation for private foundations

Polish tax law, recognizing the growing role of private foundations both as a mechanism of universal succession and tax avoidance, provides from 1 January 2019 expressis verbis their taxation in the sanctioned CFC regime. At the same time, 31 December 2018 The inclusion of private foundations in the CFC regulations raised a number of doubts, without doubt the scope of the taxation of these foundations by the CFC regulations was incomplete and, in fact, dependent on the laws of the state of incorporation of the foundation and the wording of its statutes.

Introduction

In recent years, it is possible to observe the growing popularity of private foundations as a mechanism of universal succession carried out in a pre-planned and fully controlled manner during the life of the funder – the owner of a certain wealth.

Private foundations, which are a creation unknown to Polish legislation, are typically an Anglo-Saxon legal mechanism based on the design of a trust.

However, this is quite a particular trust, as the powers of the trustee – the funder, concerning the management of the foundation and participation in its profits are generally, or at least may be, substantially limited.

At the same time, the rights of participation in the profits of private foundations may be granted to unborn people, of course, provided they come into the world.

Date 1 January 2019 many changes have come into force under Article 30f Act on 26 July 1991 on income tax on natural persons (hereinafter u.p.d.o.f.)[1] introduced under the provisions Article 1(28) Act on 23 October 2018 the amendment of the Personal Income Tax Act, the Corporate Income Tax Act, the Act – Tax Ordinance and some other laws[2] (continue u.z.u.p.d.o.f.). These changes have greatly widened the extent to which private foundations are covered by CFC regulations, while removing numerous doubts about the former wording of CFC regulations.

However, due to the highly specific regulations of the legal regimes of other states (territories) competent for private foundations, and the far-reaching freedom of the funder as to the structure and functioning of those foundations, it is possible that they will not be covered by the CFC regulations and will not be taxed as a result.

Article 30f(1) u.p.d.o.f. The analysis of the area of non-taxation of private foundations by CFC regulations, including the identification of existing legal gaps, is the primary objective of this publication.

The essence of private foundations

Private foundations constitute a legal mechanism to allow intergenerational transfers of assets and consequently avoid inheritance taxation. Private foundations may be individuals with and without legal personality, depending on the legal regime of the jurisdiction in which they function.

In principle, private foundations are a legal entity separate from companies, showing numerous elements of the Anglo-Saxon trust.

This is a purposeful (purpose trust) and a purposeful (resulting trust) private trust established for a particular person or persons by means of an intentional legal act that serves the specific purposes of the person(s) for which it has been established[3] .

In the classical trust, the trustee transfers certain assets to the trustee, who, being the formal owner of these assets, acts in his own name but to the entrustee, who remains the economic owner of these assets. The trustee therefore operates on the basis of instructions from the trustee.

In the case of private foundations, the legal relationship within the Foundation is, in principle, of a four-sided nature, as it covers the relations of the Founder, the beneficiaries of the Foundation, its management and its protector.

The foundation creates a foundation that equips it with a certain wealth, which is most often done by donations. By defining the group of beneficiaries of the foundation, the funder has total freedom to shape the current and future beneficiaries, as well as the proportion in which they will participate in the Foundation's profits.

This also means that the funder is not bound by the limitations of the inheritance law that would apply if there were inheritances. Funder can be one from the beneficiaries of the foundation, which in practice is a relatively rare case.

The most common beneficiaries of the foundation are the progressive funder. Fund beneficiaries may not participate in its management but may have their representative on the Board of Directors.

The goal and objectives of the foundation is managed by a protector, who is usually a trusted family lawyer or a law firm responsible for carrying out the succession process. The Protector is a body somewhat close to the Supervisory Board in the joint stock company, while performing certain functions typical of the board (e.g.

the obligation of a protector countersignate for key property decisions of the foundations). The Protector is also entitled to decide to dissolve the Foundation and can often make such a decision on his own (the Founder does not have such a possibility).

Private foundations are a fairly common mechanism in many countries, including those whose laws do not generally have Anglo-Saxon character. Among the most selected jurisdictions in the field of incorporation and functioning of private foundations are Malta, Great Britain, Luxembourg, Panama, Uruguay, Brazil, Australia.

Given the significant increase in fiscalism in developed countries during the international financial crisis, an increase in interest in private foundations in offshore jurisdictions can be observed.

Panama, which consistently refuses to adopt an international standard of tax cooperation in its legislation, deserves special attention in this respect.[4] .

Private foundations also have a protective function in relation to the assets transferred to the foundations, since the execution of the foundation's assets is not legally permissible and, moreover, private foundations have a highly limited possibility of depriving themselves of its assets by beneficiaries. Depending on the regulation of the statutes of the Foundation, the possibility for the beneficiaries of the Fund to dispose of the assets of the Foundation may be entirely excluded.

Furthermore, in many countries (territory) with private foundations legislation, the legal prohibition on changing the content of the trust relationship on which the foundation is based is based, after the death of the funder[5] , which makes it possible to guarantee as much as possible what will happen to the assets of the foundation, and most often that the assets entrusted to the foundation will not be sold in particular after the death of the funder.

To sum up, it can be concluded that private foundations are the modern equivalent of family ordination from the times of the First Republic.

Definition and scope of the CFC regulation

In accordance with the provisions Article 30f(1) u.p.d.o.f. the tax on foreign income of the controlled entity obtained by the taxable person subject to an unlimited tax obligation in Poland is 19% the tax base. Provision Article 30f(2)(1) u.p.d.o.f. defines ‘foreign unit’ as:

• (a) a legal person,
• (b) a capital company in the organisation,
• (c) an organisational unit having no legal personality other than a company having no legal personality,
• (d) a company not having the legal personality in question under Article 1(3)(2) Corporate Income Tax Act,
• (e) a foundation, trust or other body or legal relationship of a fiduciary nature,
• (f) a tax capital group or a company from a tax capital group which would itself fulfil the condition referred to in section 3 point 3 point (c), if it were not part of the tax group,

(g) an organisational or legal separation of a foreign company or other entity having legal personality or no legal personality

• not established, managed or registered in the territory of the Republic of Poland in which the taxable person concerned under Article 3(1) u.p.d.o.f.6 , by itself or jointly with related parties[7] , holds, directly or indirectly, a participation in capital, a voting right in the control bodies, acting as or managing bodies or a right to participate in profit[8] , including their exspect, or in which they are entitled to acquire such rights in future, including as founder or beneficiary of a foundation, trust or other entity, or a legal relationship of a trust nature, or over which the taxpayer exercises actual control[9] .

As regards private foundations, the provision Article 30f(2a) u.p.d.o.f.

provides that where, on the basis of facts, it cannot be established that the entity in question Under section 2 point 1 point (e), meet the conditions for recognition as a foreign entity, it is presumed that that entity constitutes a foreign entity if the taxpayer is the founder or founder of that entity and, whether for a fee or free of charge, has transferred the assets to that entity unless the founder (founder) demonstrates that it has definitively and irrevocably disposed of the assets entrusted.

In that case, the entity in question Under section 2 point 1 point (e), is considered to be a foreign entity when the taxpayer is or may become a beneficiary of that entity.

Under regulation Article 30f(2)(3) u.p.d.o.f. subsidiary means the entity in question under Article 3(1), or a foreign non-compliant entity Under section 3 point 3 point (b) and c in which the taxable person holds, directly or indirectly, at least 50% equity or at least 50% voting rights in control bodies, acting as or managing bodies, or at least 50% the right to participate in profit.

In turn, according to the provisions Article 30f(3) u.p.d.o.f., the foreign control unit is:

1. a foreign body established or managed or registered in the territory or country listed in a Regulation issued on the basis of Article 23v(2) u.p.d.o.f.10 either
2. foreign body established or established or registered or located in the territory of a State other than that indicated Under point 1, with which:

(a) The Republic of Poland has not ratified an international agreement, in particular a double taxation agreement, or

(b) the European Union has not ratified the international agreement, which is the basis for obtaining tax information from the tax authorities of that country, or

3) a foreign entity meeting together the following conditions:

(a) in that unit, the taxable person in question under Article 3(1), own or jointly with related parties, has directly or indirectly over 50% equity or over 50% voting rights in control bodies, acting as or managing bodies, or more than 50% rights to participate in profit, or exercise actual control over a foreign entity,

(b) at least 33% revenue of that entity achieved in the tax year in question Under section 7, is derived from dividends and other income from the participation of legal persons, from the sale of shares, from claims, from interest and benefits on all types of loans, from part of the interest lease, from guarantees and guarantees, from copyright or industrial property rights, including the sale of those rights, from the sale and implementation of rights from financial instruments, from insurance, banking or other financial activities, from transactions with related entities, where the entity does not produce added value in relation to those transactions in economic terms or is negligible,

(c) the income tax actually paid by that entity is less than the difference between corporate income tax which would have been due from it in accordance with the provisions of the Corporate Income Tax Act, if that entity were the taxable person in question under Article 3(1) Corporate Income Tax Act and the income tax actually paid by it in its country of residence, management, registration or location; the tax actually paid shall mean non-refundable or deductible tax in any form, including to another entity.

In the context of the analysis of the scope of the CFC regulation of private foundations, a significant novum is added Article 30f(5a) u.p.d.o.f. introducing a legal presumption as to the proportion in which the funder is simultaneously the beneficiary of the foundation.

According to the wording of the abovementioned rules, where the taxable person is the founder (founder) of the entity in question Under section 2 point 1 point (e), the right to participate in the profit is determined by reference to the proportion in which the market value of the assets transferred by it at the date of its transfer to all the assets of the trust, foundation or other entity or of a legal relationship of a trust nature remains.

This means that when the entire property of a private foundation was transferred to it by a funder who is a Polish tax resident, the funder will be regarded as a result of the application of the above-mentioned legal presumption. 100% the beneficiary of this foundation.

Overcoming this presumption will require the founder to disclose the statutes of the Foundation and to identify its beneficiaries. The burden of proof in this respect will rest on the fundator.

Where the taxpayer is both the founder (founder) and the beneficiary of the entity in question Under section 2 point 1 point (e), recipe section 9 shall apply mutatis mutandis unless the taxable person who is the founder (founder) demonstrates that the actual right to participate in the profit of the person concerned Under section 2 point 1 point (e), the beneficiary taxpayer is wholly entitled.

By the sound of it Article 30f(8) u.p.d.o.f., where it is not possible to determine the amount of the right to participate in the foreign profit of a controlled entity or there has been an exemption or restriction of that right, the highest percentage of the taxpayer’s share of capital or voting rights in the control bodies that constitute or manage that entity shall be assumed for its determination.

But according to content Article 30f(9) u.p.d.o.f.

in the case of the foreign controlled entity in question Under section 3 point 1, to establish the right to participate in the profit of that entity, it shall be assumed that the taxable person or the taxable person together with the other taxable persons concerned under Article 3(1), or the taxable persons in question under Article 3(1) Act on 15 February 1992 on corporate income tax[11] (Come on.

the Corporate Income Tax Act), were entitled throughout the tax year in question Under section 7, all rights to participate in the acquisition of that unit. In the absence of contrary evidence, the shares of those taxable persons relating to the right to participate in profit shall be deemed to be equal.

It follows, therefore, that in the case of private foundations:

(a) incorporated outside the EU and established or managed or registered in or in a country applying harmful tax competition, or

(b) incorporated or domiciled or head office or registered or located in a territory or country other than those mentioned above, with which: the Republic of Poland has not ratified an international agreement, in particular a double taxation agreement, or the European Union has not ratified an international agreement which is the basis for obtaining tax information from the tax authorities of that country,

• they will be taxed under the scheme Article 30f(1) u.p.d.o.f., provided that the taxable person subject to an unlimited tax obligation in Poland has an unlimited tax liability in such a foundation, directly or indirectly, at least 50% equity or at least 50% voting rights in control bodies, acting as or managing bodies, or at least 50% the right to participate in profit. If the taxable person subject to an unlimited tax obligation in Poland does not have in such a foundation, directly or indirectly, at least 50% equity or at least 50% voting rights in the control authorities, acting as or managing them, or at least 50% the right to participate in profit, it will not be subject to sanctioned taxation under the scheme Article 30f(1) u.p.d.o.f.

Another basis for private foundations to be taxed is under Article 30f(1) u.p.d.o.f., is a cumulative fulfilment of the conditions specified under Article 30f(3)(3) u.p.d.o.f. As regards this provision, particular attention should be paid to the condition of obtaining passive revenues, which must at least constitute 33% the revenue of such a foundation. This provision covers foundations incorporated in other EU Member States.

As a result, it can be said that, in principle, 1 January 2019 private foundations are clearly covered by the scope of the CFC regulation. However, the question remains whether exceptions are possible from this principle. The answer to this question has an important practical value and tax dimension in relation to the growing popularity of private foundations as a mechanism of universal succession conducted during the life of the funder.

When is the private foundation not subject to the CFC regime?

From these regulations Article 30f u.p.d.o.f. shows that in the case of private foundations, the CFC regime is a key condition for participation or control of the foundation.

If a taxable person subject to an unlimited tax obligation in Poland does not have, directly or indirectly, at least 50% shares in capital or at least 50% voting rights in control bodies, acting as or managing bodies, or at least 50% the right to participate in profit, it will not be subject to sanctioned taxation under the scheme Article 30f(1) u.p.d.o.f.

Consequently, if the group of beneficiaries of the foundation is defined in its statutes or other instrument of incorporation in such a way that no taxable person subject to an unlimited tax obligation in Poland fulfils neither himself nor the persons who remain with that taxpayer in relation to that taxpayer second grade[12] the above-mentioned participatory criteria (for participation in capital, profit, management or control), is a regime Article 30f u.p.d.o.f. will not apply to taxation of this foundation, even in the case of its incorporation in the tax haven[13].

In the case of private foundations, as a general rule, the beneficiary may also be constituted by the unborn (e.g. the grandsons of the funder), indicating an alternative way of determining the beneficiaries in the event of the death of the funder if the potential unborn beneficiaries do not come into the world at this point.

This means that a private foundation does not have a beneficiary in practice until it is born, and that state can sometimes persist for decades. At that time, it is not possible to extend the CFC regime to such a foundation, regardless of the fact that it derives passive profits.

While in such a case the foundation, in principle, cannot pay off profits, as there are no eligible entities, but from the other parties have alternative mechanisms for the remuneration of certain persons by the Foundation, for example through investments in special purpose vehicles, the actual beneficiaries of which may be any person, and, moreover, the application of these mechanisms will not require the identification of shareholders of such special purpose vehicles as beneficiaries of the Foundation.

Another case of the structure of beneficiaries of a foundation in which the CFC regulations are not used is the application one Foundation structure by at least two non-related shareholders of the company whose shares are to be transferred to the foundation in a succession process. In the case of many family-owned enterprises, the principal component of the partnership's assets is often the shares (shares) of the company concerned, and all other elements of the partnership's personal assets are acquired from profits generated by such a company.

In practice, this means that the succession process is de facto reduced to the transfer of shares in such a subsidiary of existing shareholders, with in most cases a group of shareholders counting from two to a few people. In the classical case of the use of a private foundation, each of the shareholders of such a company should set up a separate foundation and transfer its ownership of its shares (shares), which in most cases will lead to the CFC regime (where the beneficiaries of the foundation are a successor funder, usually children who are closely related).

The alternative is to use one Foundation for two or more of the shareholders of a family enterprise who transfer to it the ownership of the shares in that undertaking and establish their successors (or other persons) as beneficiaries of the foundation in proportion to the shares in that undertaking.

For example, if the shareholder structure of the Polish limited liability company, whose shares are to be succeeded by the use of a private foundation, is formed so that partner A has 30% shares, partner B 30% shares and partner C 40% if all these partners contribute to the private foundation and, in keeping with the above proportions, establish their successor beneficiaries (i.e.

A prospective partner And they will have a total right to 30% The profits of the foundation, the successor partner B will jointly have the right to 30% the profits of the foundation and the successors of the partner C will be jointly entitled to 40% the profits of the foundation), this foundation will not be subject to taxation under the scheme Article 30f u.p.d.o.f., as none of the beneficiaries of the foundation themselves or related persons will have at least 50% shares in capital or at least 50% voting rights in control bodies, acting as or managing bodies, or at least 50% the right to participate in profit.

This mechanism has historically been used quite often in Luxembourg's investment funds, but its application to private foundations is still quite rare.

It should be noted that the CFC regulations in their foundations are an implementation Directive 2016/1164 to 12 July 2016 laying down rules to prevent tax avoidance practices which have a direct impact on the functioning of the internal market[15] (Next Directive 2016/1164), which, however, limits the CFC regime to corporate taxation only, without providing for European taxation of individuals at the level of legislation[16].

Regulations Article 30f u.p.d.o.f. are therefore only part of the internal tax legislation of the Republic of Poland.

For private foundations, it is relatively easy to avoid taxation under CFC rules. The will of the funder on such a rather than a different nature of the regulation of the foundation's founding act and the circle of beneficiaries of the foundation is extremely difficult to challenge on the basis of the so-called general anti-tax avoidance clause[17], because these are elements which are not of the nature of business decisions taken in the course of a business, but elements of a succession process in which considerations of the nature of a family-emotional funder are crucial, which is something that the general anti-tax avoidance clause does not provide for, in practice, remaining alongside succession processes, even if they use elements of international tax planning.

The possibility of conditional establishment of persons unborn by the beneficiaries of the foundation may result in a total absence of beneficiaries of the foundation, which will be tantamount to non-taxing the profits of that foundation in a way Article 30f u.p.d.o.f.

The situation of use will be similar one a private foundation by several unconnected funders, leading to a dilution of the structure of beneficiaries.

However, it is only possible to implement such a solution in the case of succession within family enterprises whose ownership remains in the hands of several partners with a similar vision of succession and agreeing to the joint application of the private foundation mechanism.

However, this case will often occur in practice in Polish business realities.

The dilution of the structure of the beneficiaries of the Foundation will also result in the elimination of the CFC regime, which could apply to the profits of the Foundation if each of the shareholders of the company decided to incorporate its own foundation (at the time could be met by the criterion at least 50% equity or at least 50% voting rights in control bodies, acting as or managing bodies, or at least 50% the right to participate in the profit of such a foundation). As a result, private foundations can still be an attractive succession mechanism, but also avoidance of inheritance and donation tax[18], and indirectly also in income[19].

Amendment of provisions Article 30f u.p.d.o.f. introduced 1 January 2019 under U.z.u.p.d.o.f. Although expressis verbis covers private foundations with the CFC tax regime, although it is still not a complete regime. The failure of Polish legislation to ensure the possibility of neutral conduct of succession processes, including the lack of private foundations in the Polish legal order, mainly within Polish family enterprises, will result in and will result in the disappearance of capital outside Poland.

The lack of such legal solutions known to many European legislation, both Anglo-Saxon (e.g. Malta, UK) and continental (e.g.

Austria) is in addition to the lack of legislation addressed to holding companies one for the most important reasons for the escape of capital from Poland abroad, eliminating the possibility of attracting foreign capital to the Polish territory.

Numerous examples of the application of such legal and legal tax arrangements by EU and EEA Member States to the benefit of their national economies make the proposals of de lege ferenda and de lege lats themselves in this regard.

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[1] i.e. Journal of Laws of 2018, item 1509 as amended

2 Journal of Laws of 2018, item 2193.

3 J.E. Martin, Modern Equity, London 2001, p. 361. Quoted for: R. Rykowski, Concept of trust – legal structure of the board of trustees, Warsaw 2005, p. 51.

4 The actual data of beneficiaries of the Panamanian foundations shall not be disclosed in any publicly accessible register and shall not be the subject of an exchange of information with other authorities.

5 P. Stec, Trust in Polish law against a comparative background, Kraków 2005, p. 106.

6 i.e. taxable person subject to an unlimited tax obligation in Poland.

7 In accordance with the provisions Article 30f(2)(4) u.p.d.o.f. related entity means: (a) a legal person or an organisational entity without legal personality in which the taxpayer has at least 25% equity or at least 25% voting rights in control bodies, acting as or managing bodies, or at least 25% the right to participate in profit, (b) the spouse of the taxpayer, as well as his relatives to second (c) a legal person or an organisational unit having no legal personality in which the entity designated in point (b) has at least 25% equity or at least 25% voting rights in control bodies, acting as or managing bodies, or at least 25% the right to participate in profit.

8 As per content Article 30f(1a) u.p.d.o.f. the right to participate in profit shall also mean the right to obtain funds belonging to a foreign entity in connection with its liquidation, the right to receive a cash or non-monetary benefit, including its exspects, as the founder (founder) or the beneficiary of a foundation, trust or other entity, or a legal relationship of a fiduciary nature, or the exspect of gaining foreign profits of the entity acquired or obtained in the future.

9 The term ‘actual control’ shall be understood as being regulated Article 30f(1b) u.p.d.o.f. a check which, taking into account the facts, allows to exercise dominant influence over the functioning of a foreign entity by influencing decisions at the highest level in matters relating to a foreign entity or the ability to direct or influence its daily operation, where actual control results, in particular, from contractual links, including a contract creating a foreign entity, a decision of a court or other document governing the establishment or operation of that entity, the powers conferred or actual links between a foreign entity and the taxpayer.

10 i.e. the country or territory which applies harmful tax competition for the purposes of personal income tax. These jurisdictions are listed in the Regulation of the Minister of Development and Finance of 17 May 2017 on the identification of countries and territories applying harmful tax competition for personal income tax (Journal of Laws of 2017, item 998), hereinafter referred to as ‘r.z.p.’.

13 i.e. in the country (territory) mentioned above.

14 The principle of equality rests under Article 2 Constitution of the Republic of Poland (the principle of a democratic rule of law) under Article 32 Basic Act. The principle of equal taxation of entities ‘with a relevant characteristic’ is based on the case law of the Constitutional Court (e.g. the judgment of the Constitutional Tribunal of 16 December 1997, reference no. K 8/97).

15 Official Journal of the European Union L, No. 193 to 19 July 2016

16 In accordance with the provisions Article 1 Directive 2016/1164, it covers only taxable persons subject to corporation tax at least one EU Member State, including at least one Member State of permanent establishments of tax resident entities in countries third.

17 i.e. Article 119a-Article 119zf Act on 29 August 1997 Tax Ordinance (i.e. Journal of Laws of 2018, item 800 as amended), hereinafter referred to as ‘O.P.’.

18 Where the beneficiary of a foundation is a non-I tax group person within the meaning of Article 14(3)(1) Act on 28 July 1983 on inheritance and donation tax (i.e.

Journal of Laws, item 644 as amended) In economic terms, an effect similar to the donation of assets to which the foundation was equipped is obtained to that person (in proportion as it participates in the profits of the foundation).

The beneficiary of the foundation will benefit from it as the owner, but in formal terms the property of the foundation is not the property of its beneficiaries.

As a result, there will be no taxation of such pension or of donations (the beneficiary is not gifted within the meaning of civil law) or inheritance tax (there will be no inheritance).

19 The private foundation gives the possibility of indirect distribution of profits to its beneficiaries, which, depending on the legal arrangements of the State of tax residence of these beneficiaries, may constitute a channel for avoiding taxation. While the direct distribution of the profits of the foundations to the beneficiaries results in taxable income, indirect mechanisms of such distribution can use existing mechanisms of international tax avoidance, reducing taxation sometimes even to zero.