Family foundations compared to other succession solutions

Due to the lack of the institution of a Family Foundation in Poland, foreign Foundations enjoyed moderate interest among entrepreneurs, but a certain “barrier” for potential funders was the fact that the mechanism in question operates according to a foreign legal order. An alternative to a Family Foundation in Poland could be investment funds, in particular a Closed Investment Fund of Non-Public Assets, however in this case the costs of running such a mechanism are much higher than a Family Foundation.

Foreign foundations
The element that effectively discourages some entrepreneurs from establishing a foreign foundation is not only unfamiliarity with the foreign legal order, but also the high cost of running and legal services for this institution. Also, it should be borne in mind that running a foreign foundation involves the need to travel abroad to the foundation’s headquarters in a given country, which is not a very economical solution in terms of time as well as money, and in general it may turn out that the actual financial benefits are much lower than expected due to the aforementioned additional costs.

Moreover, in contrast to a Polish family foundation, the placement of funds by Polish residents in foreign foundations is associated with the risk that tax authorities, in the course of a potential audit, will consider that tax avoidance is taking place.

Closed-end Investment Funds
In the context of succession solutions, Closed-End Investment Funds may seem an attractive tool to look at, due to, among other things, the object exemption provided for in the CIT Law – among other things, profits flowing from the activities of the company(s) contributed to the fund are exempt from taxation.

Also an important factor in the investment process is the saving of time that could potentially be spent on the construction of investment strategies and the support offered by the fund in managing the entrusted capital, since it is the fund’s task to carry out complex activities related to the analysis of stock market trends or the economic situation of issuers. Support in the management of capital and entrusting funds with market analysis duties can result in lower investment risks and higher returns for investors.

Another advantage of an investment fund is the security of entrusted funds, because, as indicated earlier, investment funds operate under a number of legal regulations aimed at ensuring the security of entrusted funds – the legislator, in order to secure the funds of fund participants, has introduced special regulations to protect investors, these are, for example: ongoing supervision of the PFSA over the activities of the funds, a separate legal personality from the institution managing the fund (i.e. TFI), so that in the event of bankruptcy of the managing entity, the funds collected by the fund are safe.

Unfortunately, the establishment and operation of the above-mentioned vehicle is associated with the need to incur high costs with particular emphasis on the cost of running an investment fund, which consists of, among other things, expenses related to:

  • covering the costs of the TFI;
  • Establishing a depository;
  • ensuring the required level of capital;
  • meeting stringent reporting requirements.

The aforementioned expenses are just a sample of the costs that are incurred in the course of mutual funds’ operations as a result, the creation and maintenance of this structure may prove uneconomical for many investors/entrepreneurs.

In addition, an issue that may prove burdensome is the stringent reporting requirements and formalism inherent in running investment funds. Such funds must operate under a series of regulations, constantly monitor compliance with statutory requirements, and comply with liquidity and asset valuation procedures.