The recent rulings of the administrative courts have confirmed that those planning to set up a family foundation with the intention of trading in cryptocurrencies should very carefully analyse the issue.
Trading in cryptocurrencies not falling within the scope of activities of family foundations
A harbinger of a negative stance for taxable persons was the tax authorities’ previous positions expressed in tax rulings, which uniformly recognised as incorrect the view that family foundations could benefit from tax preferences (subjective CIT exemption under Article 6(1) (25) read together with Article 6(7) of the CIT Act[1]) when trading in virtual currencies.[2]
These positions have been confirmed by a recent judgment of the Provincial Administrative Court (WSA) in Poznań.[3]
The taxable person requested a tax ruling, stating the intention to establish a family foundation to which he and the other shareholder would contribute all shares of a limited liability company for the purpose of reinvesting family assets.
As a result, all assets previously accumulated in the limited liability company, including virtual currencies, were to be transferred to a newly established family foundation.
One of the doubts was whether the scope of activities of a family foundation, referred to in Article 5(1) (4) of the Family Foundations Act, could include the acquisition and disposal of virtual currencies, and thus exempt these activities from CIT under Article 6(1) (25) of the CIT Act.
According to the taxable person, virtual currencies are similar in nature to securities and derivatives (as referred to in Article 5(1) (4) of the Family Foundations Act), meaning that the scope of activities of family foundations would cover the acquisition and disposal of virtual currencies.
However, the tax authority issued a tax ruling[4] stating that the taxable person’s position was incorrect. The reasoning was that virtual currency is not a financial instrument, nor can it be considered a right similar in nature to securities and derivatives, nor is it a foreign means of payment (as referred to in Article 5(1) (6) of the Family Foundations Act).
The tax ruling was challenged by the taxable person and referred to the WSA in Poznań for review, which agreed with the tax authority and stated that virtual currencies could not be considered rights similar in nature to securities and derivatives. As a result, trading in virtual currencies by family foundations cannot be covered by a CIT exemption.
The Court also noted that, unlike securities or derivatives, virtual currency is not a financial instrument, but rather an electronic means of payment. In addition, cryptocurrencies are not controlled by a central institution, which precludes their classification as a right similar to securities or derivatives.
Doubts about the scope of activities of family foundations
The WSA judgment is not yet final. However, given its reasoning and the provisions in question, it is highly likely that it will be upheld, even if an appeal is lodged with the Supreme Administrative Court.
As can be seen, the inclusion of family foundations in the Polish legal system almost immediately raised numerous doubts among taxable persons as to the scope of their activities.
As far as virtual currencies are concerned, the doubts of taxable persons stem mainly from the use of the vague phrase “rights of a similar nature” in Article 5(1) (4) of the Family Foundations Act, which has raised hopes among crypto-asset holders. In our view, the rulings of the tax authorities and the administrative courts should effectively cool down these expectations.
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[1] Corporate Income Tax Act of 15 February 1992 (uniform text: Journal of Laws of 2023, item 2805, as amended, “CIT Act“).
[2] Cf. tax rulings of 4 August 2023, No. 0114-KDIP2-1.4010.312.2023.1.KS, and of 31 October 2023, No. 0114-KDIP2-1.4010.426.2023.2.KS.
[3] Judgment of the WSA in Poznań of 22 February 2024, case file I SA/Po 895/23.
[4] Tax ruling of 31 October 2023, No. 0114-KDIP2-1.4010.426.2023.2.KS.
