On Offshore Foundations and the Boundaries of Controlled Foreign Corporation Regulations
When Poland introduced controlled foreign corporation (CFC) legislation into its domestic legal framework in January 2015, the legislature appeared to have definitively curtailed the era of unfettered income transfers to tax havens. Reality, however, proved considerably more complex. During the initial four years of CFC regulation enforcement, numerous affluent Polish taxpayers continued to operate with impunity through private interest foundations domiciled in Panama, Liechtenstein, and the Bahamas, exploiting a fundamental lacuna in the statutory framework – Article 30f of the Personal Income Tax Act encompassed exclusively foreign corporations while conspicuously omitting the juridical universe of foundations and trusts.
Introduction
The transformative amendment of January 1, 2019, precipitated a regulatory revolution by expanding the definition of controlled foreign entities to encompass foundations, trusts, and other fiduciary entities or legal relationships. Equally significant, the legislature contemporaneously introduced the concept of de facto control – a doctrine sufficiently capacious and elastic to subject even the most sophisticated legal structures to taxation. This paradigmatic shift – from formalistic approaches predicated upon ownership interests to functional analyses of actual control relationships – exemplifies the evolution of tax law in response to increasingly complex optimization strategies.
The Invisible Architecture of De Facto Control and Controlled Foreign Corporation Regulations
Every foundational structure employed in tax planning confronts a fundamental paradox: how does one exercise meaningful control over assets while formally divesting oneself of such control? The resolution of this conundrum constitutes the key to understanding both the mechanisms employed by taxpayers and the legal instruments available to tax authorities for combating such practices.
One sophisticated solution to this dilemma has emerged in the form of Letters of Wishes – documents occupying a legal penumbra between binding instructions and non-binding suggestions. In essence, a Letter of Wishes represents correspondence from the foundation’s settlor to its board of directors or protector, articulating the settlor’s “preferences” regarding asset management, beneficiary selection, and distribution circumstances. Formally, such documents lack legally binding force – they merely express the hopes and expectations of an individual who purportedly no longer maintains legal influence over the foundation. In practice, however, professional foundation managers operating in offshore jurisdictions treat Letters of Wishes as de facto operational instructions, recognizing that non-compliance would effectively terminate their client-based business model predicated upon trust.
The essence of this arrangement lies in its elusiveness. Letters of Wishes frequently exist outside official foundation documentation, escape registration in public records, and may be modified or superseded without leaving discoverable traces. For tax authorities, proving the existence and content of such documents often represents an insurmountable evidentiary burden, particularly when foundations are domiciled in jurisdictions with limited tax information exchange. Even upon disclosure, the legal significance of such documents remains ambiguous – can the expression of “wishes” constitute evidence of exercising control?
Contemporary tax authority practice increasingly responds affirmatively to this question. Under Article 30f, Section 2, Paragraph 1b of the Personal Income Tax Act, de facto control may derive from “contractual relationships” and “documents governing the functioning” of foreign entities. Tax authorities, supported by administrative court jurisprudence, interpret these provisions expansively to encompass formally non-binding documents that practically determine foundation operations. Distribution patterns consistent with Letter of Wishes content, even when the documents themselves remain undisclosed, may constitute circumstantial evidence of de facto control.
Banking Powers of Attorney as Instruments of Control Over Foreign Structures
If Letters of Wishes represent subtle instruments of control, expansive banking powers of attorney constitute their antithesis – explicit acknowledgments of authority over foundation assets. The mechanism operates straightforwardly: a foundation that theoretically maintains independence from its settlor grants banking powers of attorney to the settlor or related parties, enabling them to manage bank accounts belonging to foundation-owned entities. Such powers frequently encompass the full spectrum of banking operations – from routine transfers to deposit closures, credit facilities, and distributions to the attorney-in-fact himself.
The dubious character of this construction is manifest. If the foundation genuinely maintains independence from its settlor, what rational explanation exists for entrusting complete control over financial assets to that individual? What legitimate purpose can be discerned in an entity managing assets for designated beneficiaries surrendering control to someone theoretically unconnected to the foundation? The answer proves equally apparent – the foundation never achieved genuine independence, and the power of attorney merely represents a technical instrument enabling the settlor to exercise control that he factually always possessed.
From an evidentiary perspective, banking powers of attorney constitute invaluable resources for tax authorities. Unlike Letters of Wishes, these documents are formal instruments registered with financial institutions whose existence and content cannot be disputed. Moreover, banks maintain detailed records of operations conducted pursuant to such powers, creating an incontrovertible audit trail of actual control exercise. Within the context of Article 30f, Section 2, Paragraph 1b, which specifically identifies “granted powers of attorney” as a predicate for de facto control, such documentation provides nearly irrefutable evidence of meeting the control criterion for CFC qualification.
Practice demonstrates that taxpayers occasionally attempt to rationalize such powers of attorney by citing purported operational necessities or technical difficulties in managing foundations from distant jurisdictions. Such arguments, however, rarely persuade tax authorities or courts, given their transparent inconsistency with claims of genuine foundation independence.
The Hall of Mirrors: Foundations Within Foundations
Consider a structure wherein Foundation A designates Foundation B as its beneficiary, which in turn designates Foundation C, which ultimately designates Foundation A as its beneficiary or leaves beneficiary determination open for future specification. Such circularity or cascading foundational structures represents one of the most sophisticated mechanisms for avoiding CFC qualification, resembling an arrangement of mirrors creating an infinite labyrinth of reflections.
The logic underlying this construction assumes that if each foundation in the chain resides in a different jurisdiction, tax authorities must penetrate successive legal and factual layers while encountering information access limitations at each step. Panama maintains no information exchange with Poland, Liechtenstein exchanges information reluctantly and selectively, the Bahamas responds to inquiries after years of delay – each jurisdiction constitutes another barrier that tax authorities must overcome. Even upon successfully obtaining information regarding all chain links, questions remain regarding interpretation of the entire structure – who constitutes the actual beneficiary when each foundation points to another?
CFC regulations, particularly following the 2019 amendments, are nonetheless prepared for such structures. Article 30f, Section 17 references indirect interest calculation mechanisms that enable “piercing” multi-tiered structures to identify ultimate beneficiaries. Furthermore, structural complexity itself may be treated as evidence indicating artificiality and absence of genuine economic substance. Administrative courts increasingly apply substance-over-form approaches, analyzing entire structures as unified economic organisms regardless of formal legal divisions.
Paradoxically, the more complex and opaque the structure, the easier it becomes for tax authorities to demonstrate that it serves no sensible commercial purpose beyond tax avoidance. No rational entrepreneur would create such complicated foundational arrangements to achieve legitimate business objectives – the management costs, legal risks, and operational hazards would far exceed any conceivable benefits. The only sensible explanation for such labyrinthine structures is the desire to conceal ultimate beneficial ownership and avoid taxation.
The Protector as Mask
In the theater of offshore structures, the protector plays a particularly significant role – an entity that formally supervises the foundation, safeguarding beneficiary interests against potential board mismanagement. In reality, protectors frequently constitute merely another mask concealing the true controller – the settlor himself.
The settlor appoints a professional nominee service company as protector – an entity existing only on paper, with management consisting of professional directors serving in hundreds of similar entities. Such protector-companies formally possess extensive control powers over foundations: veto rights over board decisions, access to financial information, investment policy oversight, and distribution approval authority. In practice, however, nominee protectors operate exclusively according to instructions from the person who appointed and compensates them – the settlor.
Often behind the protector facade lies another document – a Declaration of Trust or similar agreement wherein the protector acknowledges acting as trustee for a specified person (the settlor) and commits to executing his instructions. This document, like Letters of Wishes, typically remains undisclosed, constituting a secret operational manual for the entire structure.
Tax authorities have learned to recognize such structures. Corporate analysis of protector entities frequently reveals their nominee character – minimal share capital, absence of genuine business activity, management consisting of professional directors, and domicile in offshore jurisdictions. All these characteristics indicate that protectors are merely instruments in the hands of actual controllers, with their formal powers serving as camouflage for de facto control exercised by settlors.
Foundations Without Genuine Beneficiaries
One of the most intriguing mechanisms employed in foundational structures involves designating beneficiaries who are defined in general terms or do not exist in practice. Contemporary practice reveals foundations establishing beneficiary classes such as “future descendants of the settlor” or “persons to be designated by the board at its discretion,” creating categories that may remain perpetually empty.
What purpose does creating foundations for non-existent beneficiaries who may never materialize serve? The answer proves prosaic – maintaining control while appearing to transfer it. A foundation with an empty beneficiary class is de facto a foundation wherein the only genuinely interested party remains the settlor. He factually determines asset disposition because no one exists to object or assert competing claims.
Such constructions possess an additional illusory advantage from a tax planning perspective – they permit indefinite deferral of actual benefit transfers. Settlors may wait years, observing changes in tax law, economic conditions, or personal circumstances before deciding to genuinely shape beneficiary classes. Should tax regulations become unfavorable, they may always conclude that hypothetical grandchildren are unworthy of receiving assets and transfer them to other entities.
From a CFC perspective, particularly under Article 30f, Section 2a, such constructions constitute textbook examples of settlor-controlled structures. Since taxpayers “may become beneficiaries” of foundations – and with empty beneficiary classes and control over designation processes, this possibility is evident – the CFC qualification predicate is satisfied. The presumption in Article 30f, Section 2a operates with full force, shifting to taxpayers the practically impossible burden of demonstrating that they have genuinely and irrevocably divested themselves of control over foundations whose beneficiaries exist only as theoretical possibilities.
The Art of Presumption
The 2019 CFC amendment provided tax authorities with a formidable instrument in the form of Article 30f, Section 2a – a provision establishing a presumption that foundations constitute controlled foreign entities when taxpayers are their establishers or settlors and have transferred assets to them. This burden-shifting represents a genuine revolution in approaches to foundational structures.
Previously, tax authorities bore the burden of proving taxpayer control over foundations – a task often impossible given banking secrecy, limited information exchange, and complex legal structures. Now taxpayers must demonstrate that they have “divested themselves definitively and irrevocably of entrusted assets” – proof equally difficult, if not more challenging, to establish.
What constitutes “definitive and irrevocable divestiture” of assets? The legislature deliberately declined to define this concept, leaving broad interpretive discretion to tax authorities and courts. Certainly, formal asset transfers to foundations prove insufficient, since the mere fact of being a settlor triggers the control presumption. Nor do assurances in foundational documents that transfers are irrevocable suffice – such clauses are standard in offshore foundations and do not determine the genuine character of relationships.
Tax authority practice indicates that rebutting the presumption requires demonstrating complete absence of any influence over foundations and their assets. No Letters of Wishes may exist, no powers of attorney may be granted, settlors may not influence the selection or dismissal of boards or protectors, and they may not be beneficiaries or possess the possibility of becoming such. In practice, this means taxpayers must demonstrate that they transferred assets to strangers without any possibility of influencing their subsequent disposition – an economically absurd scenario practically unprecedented in genuine commercial life.
The brilliance of the Article 30f, Section 2a presumption also lies in its two-tiered construction. Even if taxpayers succeed in demonstrating definitive asset divestiture, foundations remain classified as controlled foreign entities if taxpayers “are or may become” beneficiaries. This formulation – “may become” – opens unlimited interpretive possibilities. May taxpayers become beneficiaries if foundational documents provide theoretical possibilities for beneficiary class changes? If foundation boards possess discretionary benefit-granting authority? If even minimal probability exists that in the future, under any circumstances, taxpayers might receive foundation benefits?
The Moment of Truth: Retrospection Without Retroactivity
One of the most fascinating aspects of the 2019 CFC amendments concerns their impact on structures created prior to that date. Numerous Polish taxpayers who transferred assets to foundations in Panama or Liechtenstein during 2015-2018, convinced they were acting entirely legally, suddenly found themselves within CFC regulatory scope.
Tax authorities maintain that no impermissible retroactivity exists here. The regulations do not operate retroactively – only foundation income achieved after January 1, 2019, becomes subject to taxation. The fact that foundations were established when CFC regulations did not encompass them is irrelevant. What matters is foundation status at the moment of income generation, not at creation.
This approach, while formally correct, raises fundamental questions regarding legal certainty and protection of taxpayers’ legitimate expectations. Can taxpayers be penalized for utilizing structures that were completely legal when created? May legislative changes impose upon taxpayers obligations to restructure their foreign investments under threat of double taxation?
Administrative courts have thus far endorsed tax authority positions, indicating that CFC regulations possess anti-abuse character and serve to protect the tax base. Taxpayers who opted for aggressive tax optimization must accept the risk of regulatory changes. They cannot invoke acquired rights protection because the right to avoid taxation never was, and is not, a protected right.
Particularly interesting are cases involving structures modified after new regulations took effect. Asset transfers to foundations in 2019 or later are interpreted as deliberate actions undertaken with full awareness of tax consequences. Such taxpayers cannot claim surprise at regulatory changes – conversely, their actions indicate attempts to circumvent CFC regulations despite knowledge of their existence.
Conclusion: Control as Illusion
The evolutionary history of CFC regulations and foundational structures narrates an eternal race between clever taxpayers and determined legislators. Every regulatory gap becomes exploited; every new control instrument encounters even more sophisticated optimization structures. Letters of Wishes, banking powers of attorney, foundation cascades, nominee protectors, and foundations without genuine beneficiaries – all these mechanisms attempt to resolve a fundamental paradox: how does one exercise control while formally lacking it?
The answer provided by contemporary tax law proves equally paradoxical: legal documentation may constitute illusion; economic reality matters. Regardless of legal structural complexity, layers of corporations and foundations, or carefully constructed documents – if taxpayers ultimately determine asset disposition and derive benefits therefrom, they will be treated as controllers.
Article 30f provisions of the Personal Income Tax Act, particularly following 2019 amendments, express this philosophy. De facto control, presumptions, broad definitions, and references to economic substance – all these instruments serve one purpose: reaching material truth regardless of formal appearances.
Does this signify the end of tax planning utilizing foundational structures? Hardly. It does, however, necessitate fundamental shifts in approach. Rather than relying upon formal structures and paper constructions, taxpayers must prepare for genuine divestiture of control, actual asset transfers, and real economic risks. Only such structures, wherein taxpayers factually lose influence over assets, can withstand CFC qualification today.
The paradox of control, however, remains unresolved. Would rational entrepreneurs ever genuinely divest themselves of control over their assets? Is transferring significant assets to strangers without possibility of influencing their subsequent disposition not contrary to basic economic logic? And if so, is not every foundational structure by definition a controlled structure, regardless of formal legal constructions?
Courts must answer these questions in subsequent years of CFC regulation application. One certainty emerges – the era of simple tax optimizations based upon geographical income transfers has concluded. The future belongs to genuine structures founded upon actual commercial activity, real substance, and authentic risk. Everything else represents mere illusion, which contemporary tax law ruthlessly exposes.
Founder and Managing Partner of Skarbiec Law Firm, recognized by Dziennik Gazeta Prawna as one of the best tax advisory firms in Poland (2023, 2024). Legal advisor with 19 years of experience, serving Forbes-listed entrepreneurs and innovative start-ups. One of the most frequently quoted experts on commercial and tax law in the Polish media, regularly publishing in Rzeczpospolita, Gazeta Wyborcza, and Dziennik Gazeta Prawna. Author of the publication “AI Decoding Satoshi Nakamoto. Artificial Intelligence on the Trail of Bitcoin’s Creator” and co-author of the award-winning book “Bezpieczeństwo współczesnej firmy” (Security of a Modern Company). LinkedIn profile: 18 500 followers, 4 million views per year. Awards: 4-time winner of the European Medal, Golden Statuette of the Polish Business Leader, title of “International Tax Planning Law Firm of the Year in Poland.” He specializes in strategic legal consulting, tax planning, and crisis management for business.
