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Taxation of an individual as a beneficiary of a trust | Natalia Jarzębowska

Taxation of an individual as a beneficiary of a trust

As a legal institution with a long tradition, especially in the Anglo-Saxon legal system, a trust raises a number of tax implications for its beneficiary. Of particular interest is the issue of taxation of payments from an inheritance trust.


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What is a trust?

A trust is an institution derived from the common law system, which does not exist in the Polish legal system. Therefore, the Polish tax resident cannot create a trust on the Polish territory. Nothing, however, precludes such a person from becoming a settlor or a beneficiary of a trust established abroad. A trust must be understood as an agreement under which the settlor of the trust disposes of his property rights in favor of the trustee, who, in turn, agrees to manage the property rights handed to him in his own name but on behalf of the beneficiary of the trust. The transfer of assets to a trustee means the transfer of effective control over the assets. This entails that the creditors of the founder of the trust cannot submit claims to the assets located in the trust. From a practical point of view, the trust assets are not private property of any of the persons appearing in the structure of the trust.

In line with the Anglo-Saxon tradition, the main purposes of the trust include securing the assets from loss as a result of a bad disposition or death. A trust can also be a succession planning tool, hence an alternative to business succession by heirs. An entrepreneur fearing that his heirs will not be able to duly continue to run his business and at the same time would like his heirs to benefit from the profit that the business generates, can set up a trust to this end, appointing a trustee and indicating his heirs as beneficiaries.

A trust, which transfers full control over the assets to the trustee is a discretionary trust, which means that the trustee decides how much and in what timeframe payments shall be made from the trust to the beneficiary. The beneficiary can only expect to receive the payment. There is no legal possibility of requesting a payment or influencing a decision of the payment, which positively affects the reliability of the beneficiary if there is any doubt on the part of tax authorities. This in turn strengthens the credibility of the establishment of an irrevocable trust, through which the founder of the trust disposes for life of the possibility of recovery of the right to manage the property of the trust as its owner. For this reason it is worthwhile to take care of such a formulation of the trust agreement which lists as the beneficiaries also the heirs of the founder. This will prevent the loss of property in case of death of the primary beneficiary.

Taxation of payments from a foreign inheritance trust

The lack of regulation of the institution of a trust in the Polish legal system causes a problem with the proper classification of income in case of withdrawal of funds from a trust to a beneficiary who is a Polish resident. Among tax advisors and tax authorities there exist two competing opinions regarding the qualification of payouts from a trust as income. One can often encounter a situation where the settlor of the trust has stipulated in the contract of the trust that the beneficiary may make payments to its beneficiaries only after the death of the settlor.

With regard to such a situation the prevailing view states that in qualifying income to the appropriate source, the aim of the establishment of the trust should be referred to. If the trust was created with the aim of protecting assets in the event of death, this is an inheritance trust. In such form it should be taxed on the basis of the on the inheritance and gift tax law. This qualification is much more favorable to the taxpayer, enabling the exemption from tax of the closest family and tax allowances as part of specific tax groups. It allows the use of exemptions for the immediate family and for tax-free amounts within individual tax groups. In addition, it represents the tax scale more preferably, where it ranges from 3% to 20% (depending on the tax bracket).

This position is accepted by the tax authorities, as confirmed by the issued individual interpretations. The Minister of Finance in the individual interpretation of 22 June 2010 (IPPB2 / 436-132 / 10-2 / AF) and the individual interpretation of 29 October 2015 (IPPB4 / 4511-998 / 15-4 / JK2) found that the payment from the trust constitutes income from bequest.

According to the competing, isolated view, a payment from a trust should be treated as income from other sources and, therefore, should be taxed according to the tax scale (18% and 32%). The Minister of Finance expressed this position in the individual interpretation IPPB2 / 415-266 / 11-6 / MK of 16 June 2011.

In case any doubt arises about the correct classification of payments from the inheritance trust, it is worthwhile to submit a request for an individual interpretation of tax law to the Minister of Finance.

Other applications of a trust

A Polish tax resident may encounter the institution of a trust also when he is a shareholder in a foreign company. It often occurs that the control over the assets of a foreign company is transferred to a trust. Also in this case the choice of such a solution is supported by the will to protect the assets e.g. against loss due to improper management. The distribution of income from the participation in the company in this case is arranged through a trust. It seems, however, that in such a situation, the construction of a trust should be tax neutral.

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