Between Scylla and Charybdis: Poland’s Presidential Veto and the Coming Tax Storm

Between Scylla and Charybdis: Poland’s Presidential Veto and the Coming Tax Storm

2025-11-29

How a well-intentioned defense of legal certainty may unleash something far worse

Introduction: Navigating Between Defective Legislation and Fiscal Lawlessness

When President Karol Nawrocki vetoed amendments to Poland’s corporate income tax law concerning family foundations on November 27, 2025, he cast himself as a defender of the principle of trust in the state. His justification reads with a certain moral clarity:

When this institution was created, the legislature assured us that the rules governing their operation would not change for a period of three years. Yet the proposed amendment introduced unfavorable changes to the taxation of already established foundations—foundations to which families had transferred their assets—after less than two years. This is a violation of the principle of trust in the state, motivated solely by the disastrous condition of public finances.

The position is rhetorically appealing, invoking the noble principle of legal certainty. But it demands critical scrutiny. My earlier analysis of the proposed amendments, titled “Legislative Ambush on Family Foundations,” focused on the fundamental flaws in the legislative technique—particularly the problem of phantom retroactivity and the absence of protective clauses known in international practice as grandfathering provisions.

Yet the complete rejection of reform, rather than its improvement, may lead to consequences far more painful for taxpayers than a poorly constructed but somewhat predictable statutory regulation. Paradoxically, the presidential veto may open the door to something considerably worse: the unlimited discretion of tax authorities operating in a legislative vacuum.

The Hijacking of the Family Foundation Idea by Aggressive Tax Optimization

The Degeneration of the Original Idea of Intergenerational Succession

The family foundation institution was introduced into Polish law by the Act of January 26, 2023, on Family Foundations and the Central Register of Beneficial Owners of Family Funds. The legislature’s intent was to create a tool enabling effective intergenerational transfer of family wealth, safeguarding the continuity of family businesses and protecting the life’s work of founders from dispersion through inheritance disputes or ill-considered decisions by subsequent generations.

Within the first months of the regulation’s operation, however, it became obvious that the institution had been hijacked by entities and advisors specializing in aggressive tax planning. Family foundations began to be used en masse for short-term, speculative constructions: assets transferred to the foundation, then disposed of using tax exemptions, with the proceeds withdrawn almost immediately through distributions to beneficiaries. Such schemes have nothing to do with intergenerational succession and constitute pure tax arbitrage, exploiting a functional loophole in the regulations.

Equally widespread has been the use of foundations for aggressive planning in short-term rentals, where properties are acquired specifically for short-term rental operations generating revenues comparable to hotel businesses but remaining under the tax exemption regime intended for ordinary residential leases. This type of activity, conducted on a commercial scale—often using professional platforms and management companies—differs little economically from running a hotel or guesthouse, yet enjoys tax preferences designed for an entirely different business model.

No less problematic is the use of structures involving tax-transparent entities to avoid taxation of capital income that under normal circumstances would be subject to corporate tax at the level of the partnership or its partners. The family foundation becomes a vehicle for accumulating profits from foreign and domestic structures without current taxation, leading to situations where entities with identical economic substance are treated entirely differently for tax purposes solely based on their legal form.

Finally, there’s an increasing use of foundations as tools to circumvent regulations on controlled foreign companies, where the family foundation becomes a repository for holding profits from foreign structures without taxation in Poland, despite the ultimate beneficiaries being Polish tax residents who actually control the entire structure.

Consequences of the Veto: From Predictable Regulation to Unpredictable Fiscal Discretion

A Pattern Known from Other Areas of Tax Legislation

The Polish tax system provides numerous examples of situations where the absence of clear—even if restrictive—statutory regulation led to an escalation of tax administration actions characterized by extreme unpredictability and violation of basic procedural guarantees for taxpayers. These historical precedents should serve as a warning about the consequences of leaving family foundations in their current, improperly regulated form.

A classic example is the history of the fight against so-called VAT carousels. For years, the lack of precise legislative solutions resulted in tax authorities applying principles of collective responsibility, conducting proceedings characterized by extreme length—dragging on for years—depriving entrepreneurs of the ability to function normally. The arbitrariness in assessing due diligence on the part of entrepreneurs reached a level where the standard required of the taxpayer was so undefined that practically anyone could be deemed insufficiently diligent, regardless of the verification measures actually undertaken.

Intimidated by prolonged proceedings, entrepreneurs agreed to unfavorable solutions, abandoning defense of their rights, knowing that the alternative was a multi-year process that would consume more resources than the disputed transaction. The lack of consistent case law meant that administrative courts issued conflicting judgments in analogous cases, completely depriving the system of predictability and making it impossible for taxpayers to rationally plan their activities.

We observed an analogous mechanism with the interpretation of the anti-tax-avoidance clause introduced in Article 119a of the Tax Code. Despite the existence of statutory regulation, its undefined nature and lack of clear boundaries of application led to situations where taxpayers were deprived of the real ability to predict whether their actions would be deemed legal tax planning or impermissible optimization. Tax authorities received a tool with such a broad scope of application that practically any transaction could be analyzed for tax avoidance, creating a chilling effect and discouraging any restructuring or optimization actions, even those entirely consistent with the letter and spirit of the law.

The Syndrome of Task-Based Audits as an Instrument of Fiscal Terror

Particularly significant—and posing a real threat in the context of family foundations—is the practice of so-called task-based audits conducted by the National Tax Administration. This is a somewhat euphemistic term for audits that don’t come to examine anything but rather to engage in what the Soviets called “dekulakization”—the systematic dispossession of the wealthy. The only question is whether they’ll take all the grain or leave something for winter.

These “task-based audits,” theoretically tools for verifying the correctness of settlements in a specific area, often transform in practice into instruments for exerting pressure on taxpayers, where audits stretch across many years, freeze bank accounts, halt VAT refunds, and completely disorganize business operations.

The National Tax Administration fights tax abuses using methods that would have earned praise from Krasnaya Zvezda, the Soviet military newspaper:

“To eliminate the kulaks as a class, it is not enough to restrict or displace individual groups. To eliminate the kulaks as a class, it is necessary, in open struggle, to break the resistance of this class and deprive it of the productive foundations of its existence and development (free possession of land, means of production, leasing, the right to hire workers, etc.).”

I’m not criticizing the statutory objectives of the National Tax Administration—only the revolutionary conviction that the end justifies the means.

The mechanism for extracting “voluntary” concessions from taxpayers works as follows: under threat of initiating criminal tax proceedings or imposing astronomical penalties, taxpayers are induced to acknowledge errors in their settlements, even though they acted in full compliance with the letter of the law. The alternative—a prolonged dispute with the authorities, with all its attendant costs, stress, and uncertainty—means many taxpayers choose the lesser evil of paying the disputed tax, even when convinced they are in the right.

Task-based audits serve as instruments for intimidating entire industries. A few high-profile audits in a given sector create a chilling effect, inducing other taxpayers to abandon legal optimizations. This is precisely the mechanism that could be unleashed against family foundations if clear regulation defining the boundaries of permissible use of this institution is not introduced.

Scenario for the Development of the Family Foundation Situation After the Veto

In the face of the presidential veto, which maintains the current, poorly constructed provisions on family foundations, we can predict a scenario unfolding in several characteristic phases.

In the first phase—an escalation in the exploitation of loopholes—the veto will be received by the market as a signal that the state is powerless against aggressive tax optimization in the family foundation area. This will lead to further intensification in the establishment of foundations and the implementation of increasingly sophisticated optimization schemes. Tax advisors will interpret this as a green light for even more creative constructions, convinced that if the legislature couldn’t introduce restrictions, the current legal state will persist for some time. During this period, we should expect a genuine boom in establishing family foundations, far exceeding the dynamics observed thus far.

The second phase will bring the inevitable reaction of the tax administration. The Ministry of Finance, facing a growing budget revenue gap estimated by the amendment project at hundreds of millions of zlotys annually, will issue directives to National Tax Administration units ordering intensified audits of family foundations. The lack of clear statutory criteria means authorities will act based on the general anti-avoidance clause contained in Article 119a of the Tax Code, interpretation of the concept of the actual nature of foundation operations, assessment of the economic sense of individual transactions, and analysis of economic substance over legal form. Each of these criteria is highly subjective and susceptible to arbitrary interpretation, meaning different authorities may reach diametrically opposed conclusions in analogous cases.

The third phase: the commencement of a massive wave of task-based audits and tax proceedings against family foundations. The characteristics of these actions will include unpredictability of assessment criteria, where each authority applies its own interpretation of abuse of the family foundation construction. In practice, this means taxpayers won’t be able to predict whether their actions will be accepted or challenged, even if they model themselves on cases where other taxpayers obtained favorable rulings.

The prolonged nature of proceedings will result from the complexity of structures and the lack of clear legal premises, causing proceedings to drag on for years, consuming resources of both taxpayers and tax authorities, but without the possibility of reaching a final resolution within a reasonable timeframe. Drastic sanctions will result from authorities questioning not only current settlements but reaching backward, imposing tax arrears, interest, and penalties in amounts often exceeding the value of the foundation itself.

Asset freezes will occur through the application of security measures for tax liabilities, encompassing practically the entire foundation’s assets, paralyzing its operation and preventing the execution of any transactions. Pressure on beneficiaries will involve authorities attempting to enforce tax not only from the foundation but also from beneficiaries, challenging the nature of distributions received and classifying them as income subject to taxation under general principles.

The fourth phase will bring judicial chaos, where administrative courts issue conflicting rulings, torn between fidelity to the principle of resolving doubts in favor of the taxpayer and a sense of responsibility for protecting state interests against abuses. In analogous cases, some judicial panels will recognize actions as legal tax planning within the boundaries of taxpayer economic freedom; others as constituting abuse of law and artificial constructions devoid of economic justification. This inconsistency in case law will deepen legal uncertainty and prolong disputes, as taxpayers must proceed through all judicial instances, hoping to eventually encounter a panel sharing their interpretation of the provisions.

The fifth phase: the inevitable collapse of trust in the institution. After several years of this chaos, the family foundation institution will be completely discredited. No sensible person will want to use it—not because the regulations changed unfavorably, but because no one will be able to predict the tax consequences of their actions. The family foundation, instead of being a tool for safe succession planning, will become a source of uncertainty and potential disputes that can drag on for years and consume a significant portion of the protected assets. Those who have already created foundations will seek ways to exit these structures, which itself may generate further tax consequences.

Why Defective Regulation Is Better Than No Regulation

Predictability as a Fundamental Value

The basic function of law is to ensure the predictability of social relations. Even if a regulation is restrictive but clear and predictable, it enables entities to rationally plan their activities. The taxpayer knows which actions are permitted and which will entail tax consequences. They can consciously choose between different courses of action, knowing their legal and financial effects, and make a decision optimal from the standpoint of their situation and goals.

The poorly constructed amendment, despite all its flaws—which I analyzed in detail in my previous article, including phantom retroactivity, lack of protective clauses, and imprecise formulations—had one fundamental advantage that outweighs all these deficiencies: it clearly specified which behaviors would be taxed. This clarity, though concerning solutions unfavorable to taxpayers, is a value in itself that cannot be underestimated.

The family foundation institution in its current form represents such a large functional loophole in the tax system that the tax authorities cannot afford to tolerate it. Or more precisely—they have a statutory obligation to tolerate it, but they won’t, because it would be contrary to their goals and operating philosophy. Lacking real legal instruments to halt the massive wave of aggressive optimizations using family foundations, they will resort to the instruments of fiscal terror described above.

Maximilien Robespierre, architect of Jacobin terror, justified his actions by the need to defend the revolution against internal and external enemies. Terror for him was not pathology but an instrument of justice when ordinary law proved insufficient. Similarly, contemporary tax authorities, deprived of clear legislative instruments to combat abuses, will inevitably reach for tools of a quasi-repressive nature, justifying them by the defense of public interest and the need to seal the tax system.

Terror without virtue is destructive; virtue without terror is powerless. This was Robespierre’s belief, and we know well that the National Tax Administration reasons the same way.

The analogy here is neither accidental nor exaggerated. Just as the Jacobins justified terror by the need to save the republic from conspiracies of aristocrats and traitors, contemporary tax administration will justify its actions by the need to defend the state budget against aggressive tax optimization. In both cases, the lack of clear, predictable legal rules leads to a situation where anyone can be deemed an enemy of the system based on subjective criteria for assessing their actions. Robespierre didn’t need proof of guilt in the legal sense; moral judgment that a given person was a threat to the republic sufficed. Similarly, tax authorities, deprived of clear statutory criteria, can base their actions on subjective assessment that a given structure or transaction constitutes abuse, even if it literally violates no specific provision.

Taxpayers who established family foundations in good faith, counting on legal stability and proceeding in accordance with its letter, may find themselves in a situation analogous to the Girondists, who suddenly discovered that the space of what was permitted had shrunk dramatically, and what was legal yesterday is treated as treason today. The fact that they acted in accordance with applicable regulations won’t help them, as authorities will assess not the letter of the law but intentions and economic effects. Just as in the time of the Terror, good faith didn’t protect against the guillotine, so in the time of fiscal terror, compliance with the letter of the law doesn’t protect against prolonged audits, asset freezes, and financial coercion.

The President’s Argument vs. Legal Reality

The Myth of a Three-Year Stability Guarantee

The central argument in the veto’s justification is the assertion that the legislature assured that the principles of family foundation operation would not change for a period of three years. This claim requires detailed verification, as it has fundamental significance for assessing the legitimacy of the veto from the standpoint of the constitutional principle of protection of trust in the state and the law it enacts.

Reviewing the justification of the Act of January 26, 2023, on Family Foundations, we find nowhere an explicit commitment by the legislature not to introduce changes for a period of three years (in particular, Article 143 of the Act is not such a commitment). Admittedly, in the public debate accompanying legislative work, government representatives indicated the intention to ensure regulatory stability as an element of building trust in the new legal institution, but this was never formalized in the form of an intertemporal provision nor recorded in the justification as a binding declaration with the character of a legal obligation.

One must clearly distinguish political assurances by representatives of the executive branch—which are not binding and do not limit parliament’s sovereignty in enacting law—from legal guarantees arising from statutory provisions, which actually bind the future legislature and whose violation can be challenged on constitutional grounds. The former are elements of political rhetoric and can serve as arguments in public debate, but they create no subjective rights for citizens nor limit the legislative competencies of subsequent parliaments.

The president’s invocation of an alleged contract between the state and citizens is rhetorically attractive but legally groundless. The state does not enter into contracts with citizens in the form of unilateral political declarations that could subsequently be enforced like contractual obligations. It is bound only by positive law, particularly the Constitution and statutes, which define the scope of competencies of public authorities and the limits of permissible interference in the sphere of citizens’ rights and freedoms.

Actual Protection of Trust vs. Protection of Expectations

The principle of protection of trust in the state and the law it enacts, derived from Article 2 of the Polish Constitution as an element of the broader principle of a democratic state governed by law, indeed belongs to the foundations of constitutional order. This does not, however, mean an absolute prohibition on changes in tax law, as such a prohibition would be irreconcilable with the dynamics of economic life and the need to adapt the legal system to changing economic and social conditions.

The Constitutional Tribunal has repeatedly addressed the limits of permissible interference with vested rights and legitimate expectations, formulating a multifaceted line of jurisprudence that allows for balancing competing constitutional values. First, the Tribunal consistently maintains that protection covers vested rights, not mere expectations of future enjoyment of specific tax preferences. If a given relief or exemption was not guaranteed for a specified time in the statute itself through the introduction of an appropriate intertemporal provision, the taxpayer cannot demand its maintenance indefinitely, as this would be tantamount to constitutionalizing specific statutory solutions.

Second, changes in tax regulations are permissible if proportionate to the goal achieved, which itself must be constitutionally justified. In the case of family foundations, the goal is obvious and repeatedly articulated both in the justification of the amendment project and in public debate: counteracting abuses that lead to erosion of the tax base and preserving the coherence of the tax system by eliminating unjustified disparities in the taxation of entities with similar economic substance. This goal is constitutionally justified, as it relates to the implementation of the principle of tax fairness and universality of taxation.

Third, the legislature should provide for appropriate transitional periods and transitional provisions that mitigate the effects of change and give taxpayers time to adapt to new conditions. This was precisely the main flaw of the amendment project, which I analyzed in detail in my previous article—not the mere fact of making a change two years after introducing the institution. Properly constructed transitional provisions, protecting the legitimate expectations of entities in the midst of implementing long-term projects, could reconcile the fiscal goal with protection of trust in the state.

Selective Protection of Trust

The president’s argument relies on selective application of the principle of protection of trust, which protects only one group of stakeholders while ignoring the interests and legitimate expectations of other participants in the legal system. The veto protects only entities that benefited from family foundation preferences—thus largely those who exploited loopholes in the regulations for aggressive tax optimization, often in a manner contrary to the legislature’s intention and the purpose of introducing the family foundation institution.

Meanwhile, the presidential argument completely ignores the interests of taxpayers generally, who bear the burden of financing budgetary holes created by abuse of the family foundation institution. Fiscal deficits don’t appear in a vacuum but must be covered either by increasing taxation of other entities or by increasing public debt, whose repayment will burden future generations. Thus the benefits of a narrow group of preference beneficiaries are financed at the expense of society as a whole—hardly a just solution.

Also omitted are those taxpayers who had no opportunity to benefit from family foundation preferences due to the nature of their activities, asset structure, or simply because they run honest businesses without seeking aggressive tax optimizations. These taxpayers have a legitimate expectation that the tax system will be fair and that similar economic situations will be treated similarly for tax purposes—a fundamental principle of tax justice.

Finally, ignored are the interests of taxpayers who will be exposed to arbitrary actions by tax authorities when the tax authorities, unable to introduce clear statutory rules, begin challenging transactions through task-based audits and application of general clauses. These taxpayers, who established family foundations in good faith, counting on legal stability, may paradoxically suffer more as a result of the veto than if the amendment had entered into force, as they will be subjected to unpredictable pressure from tax authorities.

True protection of trust means protection of predictability and clarity of law for all participants in the legal system—not immunizing a narrow group of beneficiaries of defective regulation from the consequences of its correction. The principle of equality before the law requires that similar situations be treated similarly and different situations differently, with proportionality of interference to the justifying goal. The presidential veto, contrary to declared intentions, does not protect equality and justice but perpetuates a legal state characterized by fundamental injustice and arbitrariness.

Author: Robert Nogacki, Legal Counsel, Managing Partner, Kancelaria Prawna Skarbiec