Slovaks and czech trust fund.

Why Slovaks Choose Czech Trust Funds

Although Slovak law includes provisions for foundations, these are primarily focused on public benefit purposes, and the Czech trust fund continues to offer a higher degree of flexibility, anonymity, and legal certainty.

The Czech Republic has become a natural choice not only due to geographical proximity and the absence of a language barrier but also because a functional legal framework has existed in the Civil Code since 2014. Experts from ARROWS Law Firm have been dealing with this issue for a long time and understand the specific conflict-of-law issues that a Slovak client faces.

Legislative Environment – What a Slovak Citizen Needs to Know

The Czech trust fund is regulated by the Civil Code (Act No. 89/2012 Coll., Civil Code, Sections 1448–1474). It is a pool of assets set aside for a specific purpose that lacks legal personality, which is a fundamental difference compared to business corporations. The founder sets aside the assets, the trustee manages them in their own name on behalf of the fund, and the beneficiaries receive distributions from it.

For a Slovak citizen, it is crucial that the internal affairs of the fund are governed by Czech law; it is established by a statute in the form of a notarial deed and comes into existence only upon registration in the Register of Trust Funds. A Slovak citizen must also prove that they have the legal capacity to perform legal acts. The law does not require Czech citizenship or permanent residence in the Czech Republic; full legal capacity according to the law of the home state is sufficient.

Difference Between the Czech and Slovak Legal Environments

While the Czech Republic has a clearly defined institute of the trust fund, Slovak law does not recognize this specific institute in an identical form. This creates a specific situation for a Slovak resident when dealing with Slovak authorities. Assets in the fund cease to be the property of the founder and become "ownerless" property, which may be a new situation for Slovak authorities.

Lawyers from ARROWS Law Firm have experience in correctly structuring the fund so that it stands up in an international context. This knowledge is essential, particularly when proving the origin of assets and in tax reporting.

Recognition of the Fund in an International Context and Avoidance of Double Taxation

The Czech Republic has a Double Taxation Treaty concluded with Slovakia. A trust fund established in the Czech Republic with its place of management there is considered a Czech tax resident for tax purposes.

This has practical consequences, as the fund is subject to registration with the Czech Financial Administration, maintains accounting according to Czech regulations, and files tax returns there. However, the Slovak founder or beneficiary must address the impact on their personal tax sphere in Slovakia, especially regarding distributions received from the fund.

Tax Obligations for the Slovak Founder and the Fund

A trust fund in the Czech Republic is a corporate income tax payer. This means that income generated by the fund (e.g., from real estate rental, securities trading, interest) is subject to corporate income tax in the Czech Republic. The rate of this tax is 21% (applicable for tax periods starting from January 1, 2024). The gratuitous allocation of assets into the fund by the founder is generally not taxable income for the fund.

When paying distributions to a beneficiary in Slovakia, it is necessary to examine the nature of this income. If it is a share of profits, the Czech Republic standardly applies a withholding tax, which may be reduced under the Double Taxation Treaty, usually to 15%. The beneficiary can, under certain conditions, offset this tax against their tax liability in Slovakia. It is important to distinguish between the distribution of profit and the distribution of the original contribution, which may have a different tax regime.

Tax Residency and Reporting to Authorities

A Slovak founder or beneficiary who is a tax resident of Slovakia is taxed on their worldwide income in Slovakia. Therefore, income from a Czech trust fund must be declared in their Slovak tax return. To avoid double taxation of the same income, methods for the avoidance of double taxation according to the valid international treaty are applied.

A problem arises if clients do not realize that their obligations do not end with the payment of withholding tax in the Czech Republic and neglect to declare the income in Slovakia. This can lead to additional tax assessments and penalties from the Slovak financial administration.

Registration Obligations and the Register of Beneficial Owners

The fund must register for income tax with the Czech tax office and fulfill obligations under the Act on the Register of Beneficial Owners. The trust fund must record its beneficial owner in this register, who is typically the founder, trustee, beneficiary, or persons exercising influence over the management of the fund.

Sanctions for failure to comply with the registration obligation in the Register of Beneficial Owners in the Czech Republic can reach up to CZK 500,000. Furthermore, a ban on the payment of profit shares or voting rights may occur, which can paralyze the fund.

Practical Steps to Establishing a Fund

• Preparation and Analysis
  The first step is a thorough analysis of the founder's asset situation and goals. It is necessary to define the scope of the assets being set aside, the circle of beneficiaries and conditions for distributions, the duration of the fund, and the person of the trustee.
• Drafting the Statute
  The statute of a trust fund requires the form of a notarial deed. It contains mandatory requirements according to the Civil Code, but its individualization is key. The statute should be drafted in the Czech language to comply with the requirements of the Czech register and legal system.
• Selection of a Trustee
  The trustee can be any natural person with full legal capacity, or an investment company. If the founder is the trustee, the fund must have an additional, independent co-trustee (see Section 1456 of the Civil Code). The trustee performs full management of the assets and has fiduciary duties.
• Registration and Entry into the Register
  After signing the statute and the contract on the appointment of the trustee, registration in the Register of Trust Funds follows. The application for registration is usually submitted by a notary or the trustee. The fund legally comes into existence only upon registration, followed by tax registration and entry into the register of beneficial owners.

Most Common Mistakes and Risks

• Non-comprehensive Preparation of the Statute
  The use of general templates is highly risky for trust funds. A statute that does not account for the death of the founder, the removal of a trustee, or the resolution of disputes between beneficiaries can completely paralyze the fund in the future. For Slovak clients, a common mistake is insufficient provision for service of process and jurisdiction in case of disputes.
• Incorrect Tax Setup and Reporting
  Ignoring CFC rules (Controlled Foreign Company rules) or incorrect application of withholding tax are among the frequent errors. If the fund generates passive income, it may have specific impacts on the Slovak tax base of the founder even before the actual distribution of profit.
• Incorrect Identification of Beneficiaries
  A vague definition of beneficiaries ("my family") without a precise key for distributing benefits puts the trustee in an insoluble situation. Such a setup creates a risk of litigation regarding the invalidity of the statute due to uncertainty.

Most Common Problems and Their Solutions

How to Avoid Problems with Authorities

• Correct Registration and Compliance
  The basis is the precise execution of all registration steps, which include entry in the Register of Trust Funds, registration for income tax, entry in the Register of Beneficial Owners, and setting up accounting. ARROWS Law Firm guides clients through the entire process and monitors legal deadlines.
• Transparent Communication with Banks
  Given the strict AML regulations (Anti-Money Laundering Act), it is necessary to proactively provide the bank with the fund structure and the origin of the invested assets. Lack of transparency leads to an immediate refusal of services.
• Regular Review
  We recommend conducting a legal and tax review of the fund's operation at least once a year, especially considering frequent amendments to tax laws in both the Czech Republic and Slovakia.

Conclusion

Establishing a Czech trust fund is an effective but technically demanding process for Slovak citizens. It is not merely about "filling out a form," but about creating a sophisticated legal structure that must withstand time, tax audits, and potential family disputes. Legal and tax aspects require a professional approach.

Lawyers from ARROWS Law Firm have extensive know-how in establishing and managing cross-border structures and eliminate risks at their inception.

If you are considering establishing a trust fund and want to be sure of the correct procedure, do not hesitate to contact us at consultation@arws.cz. ARROWS Law Firm has high professional liability insurance coverage in the hundreds of millions of crowns and guarantees expertise backed by years of practice.