Business activity in Poland by individual individuals or in the form of commercial companies entails significant tax burden. Due to the high taxes associated with conducting business activity in such legal forms, many entrepreneurs are considering an alternative form of doing business, allowing for a reduction in the burden on the tax. This is possible in the form of a foundation or association.
Natural persons engaged in so-called one-man business activities and commercial law companies are normally obliged to pay VAT on goods or services sold. Depending on the subject-matter of the activity, VAT rates vary widely and are respectively 23%, 8%, 5% or even 0%.
Furthermore, persons engaged in economic activities in the form of, inter alia, capital companies (limited liability, public limited liability), including at the stage of capital companies in the organisation, and in the form of a limited partnership, must pay corporate tax (CIT) and entrepreneurs conducting one-person business activity – PIT.
It is also worth noting that CIT taxation is also subject to all those partnerships which are established or managed in another country if, in accordance with the laws of that country, they are treated as legal persons and subject to taxation in that country on all their income regardless of where they are achieved.
Reduced tax burden for foundations
According to Article 1 Act dated 6 April 1984 about foundations (Journal of Laws of 2018, item 1491 4) the foundation may be established for the achievement of social or economic purposes in accordance with the fundamental interests of the Republic of Poland, in particular: health protection, economic and scientific development, education and education, culture and art, social protection and assistance, environmental protection and care of monuments.
It should be stressed that the directory of the activities of the Foundation is open and therefore the object of its activities may go beyond the examples set out in that provision. Undoubtedly, however, the objectives of the foundation must be socially or economically useful.
As stated by the Supreme Administrative Court in its judgment dated 8 February 1994, reference no.
SA/Lu 1321/93: „The objectives of the foundation, being one the conditions to exclude the income of a corporate tax foundation(...) must be directly derived from the statutes of the foundation; they cannot be determined by tax authorities by interpretation to which they are not entitled.
A similar view was expressed by the Provincial Administrative Court in Warsaw in the judgment dated 10 March 2004, reference no. III SA 1968/02.
In turn, in the judgment dated 26 October 2005, III SA/Wa 2262/05 The Court of First Instance indicated that the statutory objectives of the Foundation are the objectives which the founders set it in the Statute, other than the functioning of the Foundation as a commercial entity.
The Foundation may carry out economic activities in size to achieve its objectives, with the value of the assets of the foundations for economic activity not less than 1,000 PLN (Article 5(5) the abovementioned Act).
The economic activity carried out by the Foundation must be closely linked to its statutory objectives and cannot be a separate objective of the Foundation. It is worth noting that foundations can carry out any kind of economic activity, provided that specific laws do not reserve a specific form of business.
It should also be remembered that the possibility of the foundation to conduct economic activities must be specified in the statutes of the foundation. According to Article 11(1) The abovementioned Act requires the foundation to undertake an economic activity not provided for in the Statute to change the statutes in advance.
Business activity in the form of a foundation may result in a reduction in tax burden, which, of course, results in an increase in profit.
According to Article 43(1)(31) point (b) Act dated 11 March 2004 on tax on goods and services (Journal of Laws of 2011, item 177.1054 of the day 26 August 2011) VAT exempt services and the supply of goods closely related to those services, carried out by organisations set up for purposes of a philanthropic or civil nature, in terms of the collective interest of their members, performed to their members in exchange for contributions the amount and principles of which arise from the statutory provisions of those entities, provided that they are not committed to profit-making if the exemption does not result in a breach of the conditions of competition.
Therefore, if the conditions laid down in that provision are met, the foundation shall be exempt from VAT.
In addition, the Foundation may benefit from a VAT exemption to a greater extent if it becomes a public benefit organisation, in which case the supply of certain goods acquired by the Foundation by way of a donation received in connection with a public collection or for funds raised from a public collection is exempt.
If one of the above conditions is not fulfilled, the foundation may benefit from a general exemption, i.e. the value of the sale. 150,000 PLN, according to Article 113(1) VAT Act.
In turn, according to Article 17(1)(4) Act dated 15 February 1992 on corporate income tax (Journal of Laws of 2019, item 865) The tax-free income of taxpayers whose statutory objective is scientific, scientific and technical, educational activities, including the education of students, cultural, physical and sports culture, environmental protection, support for social initiatives for the construction of roads and telecommunications networks in the countryside and the provision of water, charity, health and social assistance, professional and social rehabilitation of disabled people and religious worship - in the part intended for these purposes.
Therefore, if the statutory objectives of the Foundation are in line with the objectives set out in that provision, the Foundation shall benefit from an exemption from CIT.
It is also worth paying attention to Article 16 Foundations Act, according to which the acquisition by the foundation by inheritance, record or donation of money or other movable or property rights is exempt from inheritance and donation tax.
At this point, attention should be paid to the possibility of conducting business within the private foundation provided for in the laws of certain countries. Such a foundation could also operate in Poland, by setting up a representation on a specific basis under Article 19 Foundations Act.
Tax relief for associations
As regards business activity in the form of an association, it should be noted that Article 34 Act dated 7 April 1989 – Association law (Journal of Laws of 2019, item 713), according to which the association may conduct economic activities, in accordance with the general principles laid down in separate rules.
It should be stressed that the income from the association's economic activities serves the statutory objectives and cannot be allocated to distribution among its members. As the Supreme Court indicated in its resolution 7 Judges dated 27 February 1990, reference no.
III PZP 59/89: „The income of the association obtained from economic activities serves the statutory objectives and cannot be allocated to the division among its members even if they are employees of the association.’ Furthermore, an association engaged in economic activities benefits from VAT and CIT exemptions to the extent that such exemptions are granted to foundations which fulfil the conditions for obtaining such exemptions.
However, according to Article 17(1)(5) Tax-free CIT Act is the income of companies whose shareholders (shareholders) are exclusively organisations operating under the Act – Law on associations whose statutory purpose is the activity listed Under point 4 (discussed above at the foundation) – in part intended for these purposes and transferred to these organisations.
However, it should be noted that, unlike the foundation, the association is not exempt from inheritance and donation tax.
Author: Aleksandra Księżyk – Legal advisor, Director of the Legal Department in Warsaw Chancellery Russell Bedford Dmowski and Partners Law Firm sp. k.