In previous posts we wrote about the taxation of business activity carried on by a family foundation. It follows from the general rules on the taxation of a family foundation that CIT is levied on benefits provided to the foundation’s beneficiaries, including assets transferred in connection with its dissolution.
The payment by a family foundation of benefits qualifying as so-called hidden profits has also been made subject to CIT. The aim was to prevent family foundations from being used for tax-optimisation purposes. So what are hidden profits?
The concept of hidden profits
Benefits in the form of hidden profits are understood to mean:
1) interest, commissions, remuneration and other fees on any type of loan granted to the family foundation by a beneficiary, the founder or an entity related to a beneficiary, the founder or the family foundation;
2) donations or other gratuitous or partially gratuitous benefits [other than those consistent with the statutes and the list of beneficiaries], provided, directly or indirectly, to a beneficiary, the founder or an entity related to a beneficiary, the founder or the family foundation;
3) intangible services provided to a beneficiary, the founder or an entity related to a beneficiary, the founder or the family foundation, in respect of:
a) advisory services, accounting, market research, legal services, advertising services, management and control, data processing, employee recruitment and personnel acquisition services, guarantees and sureties, and benefits of a similar nature [which in practice means an open-ended catalogue of the types of services taxed],
b) fees and charges of any kind for the use of, or the right to use, licences and property rights;
4) the difference between the market value of a transaction and the price agreed for that transaction – in the case of transactions between the family foundation and a beneficiary, the founder or an entity related to a beneficiary, the founder or the family foundation;
5) a loan granted by the family foundation to a beneficiary, in the part that was due for repayment in the given tax year and was not repaid by the deadline for filing the annual return;
6) a loan granted by the family foundation to a beneficiary for a period of at least 10 years, or for a period shorter than 10 years if the ultimate term of the agreement amounted to at least 10 years.
Taxation of hidden profits
Benefits meeting the definition of hidden profits are taxed on rules similar to those applying to benefits paid out by the foundation to its beneficiaries. They are subject to 15% CIT on the benefit provided or made available. Here too, the taxpayer is the foundation itself.
The tax base is the revenue corresponding to the value of the benefit or assets. Accordingly, the tax base will be the revenue corresponding to the value of the benefit provided or made available as a hidden profit. Where the subject of the benefit or the assets are things or rights or other benefits in kind, including things and rights provided or made available free of charge or partially for consideration, as well as other gratuitous or partially gratuitous benefits, their value will be determined using the general rules on the matter.
Hidden profits in the tax authorities’ rulings
The framework for taxing hidden profits in a family foundation is relatively new, but a number of tax rulings have already been issued in this area.
Use of a car by the foundation’s management board
Where a car is used by a beneficiary or the founder, as members of the family foundation’s management board, solely for the purposes of the foundation’s permitted business activity, there will be no provision of benefits to beneficiaries, nor of benefits in the form of hidden profits – subject to corporate income tax on the part of the family foundation [0114-KDIP2-1.4010.482.2023.4.KS].
Rent paid by the foundation to its founder
Rent paid by the foundation will not constitute revenue for the foundation corresponding to the value of a benefit in the form of hidden profits and will therefore not be subject to 15% CIT, provided it is set on market terms. Rent paid by the foundation to the founder does not fall within the catalogue of events taxed as hidden profits. That catalogue is closed and does not include rent paid under a property lease agreement concluded on market terms. [0111-KDIB1-2.4010.258.2023.1.EJ]
Complicated? See how we can help:
we keep the foundation’s accounting and tax books, and help establish the chart of accounts and create the reporting structure for the foundation’s governing bodies
we advise on all tax aspects of setting up the foundation and of the business activity it carries on
as part of our cooperation with lawyers involved in drafting the family foundation legislation, we will help you open and register a family foundation
