Profits in disguise
The concept of hidden profits is one of the key constructs in the corporate income tax (CIT) system. Although it derives from the Estonian CIT concept, its application has been extended to provisions on family foundations.
In practice, this refers to situations where a family foundation, despite being generally exempt from CIT, transfers assets to the founder or beneficiaries in a way that provides them with a financial benefit equivalent to a profit distribution. This is not technically a formal profit distribution, but rather a different benefit such as a loan, donation, fee or service.
The legislature decided that such transactions could lead to the circumvention of tax exemption and therefore have introduced a mechanism for taxing so-called hidden profits.
Consequently, a foundation cannot benefit from the exemption if it transfers assets to the founder or beneficiaries under the guise of other transactions.
Limited exemption
Family foundations are eligible for an entity-based CIT exemption, provided they operate within the statutory limits. However, this exemption does not apply to tax on hidden profits.
Notably, the original version of the family foundation bill did not impose any such restrictions. It was only during the Public Finance Committee’s deliberations that the potential for abuse was recognised, particularly the possibility of using foundations to transfer assets to the founder or beneficiaries without paying tax, under the guise of other transactions such as payments for fictitious services, excessive remuneration, or loans serving as a substitute for profit distribution. Therefore, the restriction was justified by the need to maintain a balance between a family foundation’s succession function and its tax neutrality.
At the same time, some commentators pointed out that, despite its statutory definition, the concept of hidden profits could be interpreted too broadly by the tax authorities. In particular, they were concerned that the mechanism for taxing hidden profits could limit the attractiveness of foundations as a tool for succession and the protection of family wealth.
When hidden profits emerge from the shadows
Despite the seemingly precise wording of the provision, identifying a given benefit as hidden profit is not always straightforward in practice. However, the result is very real taxation.
The tax rate is 15% of the tax base, which is the value of the benefit or property transferred or made available to the founder, beneficiary or an entity related to them.
The tax obligation arises when the benefit is transferred or made available, and the tax must be paid by the 20th day of the month following the month in which the transfer was made.
The list of benefits considered to be hidden profits is closed and includes, among others:
- Interest and commissions on loans granted to the foundation by the founder or beneficiary
- Gifts and other gratuitous benefits in their favour
- Remuneration for advisory, legal or management services provided by related entities
In its tax ruling of 22 December 2023,[i] the tax authority explicitly stated that this list was closed, therefore, any benefits not included in the list could not be classified as hidden profits.
Administrative courts have taken a similar position, including the Provincial Administrative Court in Poznan (judgment of 30 April 2024, case no. I SA/Po 88/24) and the Provincial Administrative Court in Lodz (judgment of 11 April 2024, case no. I SA/Łd 134/24), emphasising that, to be considered a hidden profit, a given benefit must be explicitly mentioned in the list.
However, reaching an agreement on the closed nature of the list does not put an end to disputes. While this makes it easier to identify what is not included, doubts remain as to what is actually covered. Tax authorities and taxpayers often interpret the same provision differently.
Below are a few examples of such issues.
Remuneration of the founder for managing a family foundation
This issue was the subject of a tax ruling by the Director of the National Tax Information Service (KIS) of 19 December 2023.[ii] The applicant stated that the foundation intended to enter into a management contract with the founder (who was a member of the executive committee), under which the founder would carry out management and supervisory duties in exchange for market-based remuneration.
The tax authority disagreed with the taxpayer, considering that the remuneration paid to the founder constituted a hidden profit and that the service fell within the list of management and audit services.
This interpretation was also endorsed by administrative courts, specifically the Provincial Administrative Court in Lodz (judgment of 11 April 2024, case no. I SA/Łd 134/24) and the Provincial Administrative Court in Poznan (judgment of 30 April 2024, case no. I SA/Po 88/24). Both judgements concluded that, even if the remuneration is market-based and relates to actual services provided, payment to the founder as beneficiary of the foundation constitutes a transfer of financial benefit and thus gives rise to hidden profit.
Rent paid by a family foundation to its founder for a property
However, not all situations result in disputes with the tax authorities. A good example of a reasonable approach can be seen in the tax ruling of 11 August 2023,[iii] in which a foundation rented part of a building from its founder to use as its headquarters. The rent was set at market level and the founder was also a beneficiary of the foundation.
The tax authority ruled that, as rent is not included in the list, it cannot be considered hidden profit. They also emphasised that a transaction concluded on market terms does not give rise to differences, and consequently there are no grounds for taxing such rent as hidden profit. A similar position was also presented in the ruling of 11 August 2023.[iv]
Family foundations: from the idea of stability to a legislative experiment
One of the greatest advantages of the current regulations on hidden profits in family foundations is that the list of benefits covered by this regime is closed. This provides (at least in theory) some legal certainty, which in the Polish tax system is more of an aspiration than a reality. It makes it possible to distinguish clearly between benefits that result in the loss of CIT exemption and those that do not.
Unfortunately, however, this clarity is becoming increasingly theoretical.
The Ministry of Finance’s draft amendment of 29 August 2025 (effective from 1 January 2026) proposes extending the list of hidden profits to include, among other things, benefits to the founder (even if he or she is not a beneficiary) and related entities.
Loans will become particularly risky. Those that are not repaid, written off, or become time-barred, will be considered hidden profits by the tax authorities and taxed accordingly.
Consequently, the closed list, intended to safeguard the stability of the tax structure, is gradually being opened up through successive amendments. In practice, this means that each year, fewer and fewer benefits will remain outside of its grip.
Additionally, the draft provides for the application of CFC and exit tax regimes to foundations, as well as the introduction of temporary restrictions on the disposal of assets. Such ‘tightening’ of the system undermines the principle that guided the legislature when creating the family foundation model: the stable, intergenerational accumulation and protection of family wealth.
If the current rate of legislative amendments continues, family foundations will soon cease to be a means of passing on wealth and will instead function as a fiscal experiment based on a lack of trust in citizens. For a structure designed to build stability and trust, this would be a paradox of the highest order.
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[i] No. 0114-KDIP2-1.4010.543.2023.3.MR1
[ii] No. 0111-KDIB2-1.4010.423.2023.2.AJ
[iii] No. 0111-KDIB1-2.4010.291.2023.1.EJ
[iv] No. 0114-KDIP2-1.4010.340.2023.1.KW
