A family foundation may be an interesting solution in the context of succession

Family foundations, which have been available, in theory, since May of this year, are primarily intended to solve succession issues when the death of a business owner meant successors had to go through complicated and lengthy succession proceedings, which in practice often prevented the company from continuing its business. A family foundation is therefore intended to enable the management of the company’s assets and support succession planning for the next generation.

The idea is for a family foundation to own the assets transferred to it and to distribute the income derived from these assets to the beneficiaries.

Unfortunately, foundations only work in theory so far, as there are still problems with their registration, although this problem should be resolved soon.

A family foundation is a legal entity subject to corporate income tax (CIT). The taxation of a family foundation is somewhat similar to Estonian CIT since, as long as the foundation does not make benefit payments to beneficiaries, it does not pay income tax unless its activities go beyond the permitted statutory scope. When a benefit is paid out, the foundation taxes the value of the paid out benefit with 15 per corporate income tax and then with 10% or 15% personal income tax.

The provisions on a family foundation also provide for other tax benefits, starting with its establishment. The establishment of the foundation and the transfer of assets to it is not taxed. The legislation assumes that – unlike with the establishment of a company – there is no taxable income on the part of the family foundation or its founders. The tax on civil law transactions (transfer tax) has also been waived with regard to the activities that constitute a family foundation (i.e. on the transfer of assets).

While this is beneficial, a problem arises when disbursing funds to the beneficiaries, as deductible expenses and depreciation cannot be deducted when calculating tax. The tax base is the income equal to the value of the benefit or property received by the beneficiary.

The business activities of a family foundation are limited by law and may consist in particular of:

• trading in assets, including shares in companies;
• leasing;
• granting of loans to companies in which the family foundation holds shares, or to the beneficiaries;
• trading in foreign currency for the purpose of making payments related to the activities of the family foundation; and
• activities in connection with an agricultural holding.

If a family foundation goes beyond the above catalogue in its activities, it has to expect to pay CIT at a rate of 25 per cent.

If a family foundation is dissolved and the property is transferred, the applicable CIT is 15%. However, in such a situation, the taxable income is adjusted by the tax value of the property contributed to the foundation by its founder. This value is equal to the tax cost that the founder would have taken if the property had been disposed of for consideration immediately prior to its contribution to the family foundation. It is important that this value does not exceed the market value of the property. These provisions are part of the regulations aimed at ensuring fair and adequate taxation when transferring property in connection with the dissolution of a family foundation.

Tax benefits are also provided for beneficiaries, who are exempt from personal income tax (PIT) if they belong to the founder’s immediate family. This refers to the founder and their spouse, ascendants, descendants, siblings, stepchildren, stepfather or stepmother.

Individuals classified to tax group I or II within the meaning of the inheritance and donation tax regulations (i.e. further family members) will pay PIT at the rate of 10 per cent. Other beneficiaries, not related to the founder, will pay 15 per cent PIT.

The foundation is subject to VAT like any other business entity, i.e. depending on the activities performed and revenues generated.