Trust funds and their use in real life

Based on the amendment to the Income Tax Act effective from 1 July 2017, trust funds could be considered a parent company and - when meeting certain conditions - exemption from tax on received payments of profit shares from a subsidiary could apply, similar to parent companies which are joint-stock companies, limited liability companies, or a cooperative. The change can help with better use of trust funds because, thanks to this, the trust funds are tax neutral. They do not have any tax advantages, but at the same time if they are structured correctly, they also do not have any tax disadvantages.

Trust funds were introduced in the Czech Republic in 2014. Their governance in the Civil Code was inspired by Quebec civil law where the concept has been in operation for 24 years. Despite this, the instrument was not really used in the Czech Republic in the beginning because it is a relatively new concept which was unknown to many people, including lawyers and public notaries. In the last 18 months, there has been a significant change in its use, not only because of the time that has passed but also thanks to the above-mentioned positive changes related to tax burdens.

The general public has begun using trust funds. The funds can be used for many purposes, most often for the protection of property, inheritance matters, and handing over family firms to the next generations. In many cases, they allow such solutions that had not existed in the Czech Republic before:

• Holding structures

• Protection of family property against future risks and legal actions

• Structures for seeking a balance between the needs of current partners with children against property claims from current and previous marriages.

• Structures resulting in the reduction of the worst consequences of statutory inheritance - including the possibility of skipping a generation

• Handing over of family firms to the next generations - structures that allow the handover of the firm's ownership to the family but control stays in the hands of the founder and/or handed over to professional managers who are designated by the founder.

• Trust funds for publicly beneficial purposes - providing school fees, building and maintaining concert halls, etc.

• Structures maintaining family property for the benefit of future generations.

For the correct functioning of the structure using the concept of the trust fund, it is essential that - with respect to novelty of the concept - the structure be prepared and implemented by experts. The important thing is not only preparation of the documents of incorporation, but also the subsequent correct administration of the trust fund. In addition, important aspects relating to taxation include the contribution of property to a trust fund, taxation of income generated by the fund activities and subsequently - and namely - the tax aspects of future supplies of profit or fund property to the benefit of the beneficiary.

 (The chapter was prepared with the help of experts from Svěřenské fondy a trusty s.r.o.)