Family Foundations and Trust Funds 2026

Legal Form and Basic Tax Status: When a Fund is a Party to Tax Proceedings

The first step you need to clarify is the legal nature of what you are actually establishing. Under Czech legislation, a distinction is primarily made between a foundation (or endowment fund) and a trust fund for asset management purposes. The difference is fundamental, as it entails different legal and administrative obligations. When choosing a suitable structure and setting the rules for asset management, the broader context of tax law can also be helpful, especially if the fund will be receiving income or making payments to beneficiaries.

A foundation is a legal entity with its own legal personality, which can own property and enter into contracts. You must establish a foundation via a notarial deed and contribute a minimum of CZK 500,000 as an endowment. Once the foundation is registered in the Foundation Register, it acquires legal personality and automatically becomes a corporate income tax payer.

A trust fund, on the other hand, is an entity that lacks legal personality. The property in the fund is "ownerless property," meaning it does not belong to the founder, the trustee, or the beneficiaries. From a procedural standpoint, the trustee acts on behalf of the fund, but from a tax perspective, the trust fund is treated as a corporate income tax payer.

A trust fund is registered in the Register of Trust Funds and offers a higher degree of anonymity and flexibility, but it requires a precise statute. For practical steps in setting up the structure and transferring shares in a family business, see also the article Transferring a Business Share in a Family Company: How to Set Up the Legal Steps Correctly and Avoid Tax and Property Risks?. A practical consequence is that a foundation must be registered in a public register and is subject to stricter formal supervision.

Both foundations and trust funds can have a family character, meaning their primary purpose is to support family members or manage family assets. In that case, they are not considered public benefit taxpayers and have a different tax regime than foundations dedicated to charity.

The Fund's Tax Burden: What Is and Isn't Taxed

The most common mistake is the assumption that a family fund is a tax haven. A fund (whether a foundation or a trust fund) is subject to corporate income tax. The current tax rate is 21%, which is an increase from the previous 19% as part of the government's consolidation package.

Income exempt from tax at the fund level includes asset contributions and dividends. The segregation of assets into a fund is not taxable income for the fund. Dividends from a business corporation in which the fund holds at least a 10% share for 12 months may also be exempt if the subsidiary is based in the EU.

A family foundation that does not serve a public benefit purpose does not automatically have its investment income exempted. Previously, foundations enjoyed a broad exemption for income from their endowment, but current regulations distinguish between public benefit and private foundations. Income from interest, rent, or the sale of securities is subject to the standard 21% tax.

All regular income, such as from property rental or capital gains, is taxed at a rate of 21%. If a fund sells real estate or a share in a third company outside the exemption regime, it is considered taxable income. In practice, it is therefore worthwhile to have properly drafted contractual documents and decision-making processes, which typically falls within the area of contracts and negotiations.

Unlike individuals, funds do not have a general time test for exemption. The sale of real estate by a fund is therefore always taxable, regardless of the length of ownership.

However, the situation for business shares and stocks is different and very tax-advantageous. If a fund sells a share in a subsidiary (holding at least 10% for more than 12 months), the profit is completely exempt. When setting up ownership structures and transferring shares within family foundations or trust funds, it can be useful to draw on the principles of corporate law, holding companies, and structures. Thus, primarily only sales of small portfolio investments (under a 10% share) are taxed.

Tax Advantages of Family Foundations and Trust Funds: Where Optimization Makes Sense

So why do entrepreneurs establish these structures? The main advantages lie in asset protection, continuity of management, and a specific regime for payments to family members, which offers certain tax reliefs.

If a family fund makes a payment to a beneficiary, this payment is exempt from personal income tax for the beneficiary. This applies if the beneficiary is a relative in the direct or collateral line of the person who contributed the assets to the fund. However, it is necessary to distinguish between payments from profit and payments from assets.

The second advantage is that assets in a foundation or trust fund do not go through probate proceedings upon the founder's death. Probate proceedings involve notary fees, are time-consuming, and carry the risk of disputes, whereas assets in a fund are managed continuously according to its statute.

The founder's creditors cannot directly touch it, except in situations where the contribution to the fund could be challenged for defrauding creditors. The assets in the fund are legally separate from the founder's assets, which ensures greater asset protection.

The fourth advantage is management flexibility, as a foundation or fund allows for setting rules for handling assets for generations. Simple inheritance does not allow for such a degree of control and long-term planning.

You can clarify all these questions with the lawyers at ARROWS law firm at consultation@arws.cz.

Distributions to Beneficiaries: When and How Much is Taxed

The distribution of funds from a fund is the most tax-sensitive moment, and it is crucial to distinguish the nature of the source of the money. You need to know whether you are distributing profit generated by the fund or returning the original contribution (principal).

The fund must withhold a 15% withholding tax, or higher for non-residents without a tax treaty, if it is distributing a share of profits. If the fund has generated profit from rent or dividends and distributes this profit, it is considered income from capital assets, and this tax is final.

If the fund fails to withhold the tax and pays out the full amount, the tax authority will assess the tax on the fund, including penalties and late payment interest. It is therefore essential to have proper accounting that tracks these flows.

If a beneficiary receives a payment that is not a share of profit but is effectively a withdrawal from the fund's substance, this income is exempt for the beneficiary. This applies if the beneficiary is a person close to the founder, and it is thus a return of the principal.

However, the Income Tax Act establishes a legal fiction that profit is always distributed first, and only after it has been exhausted can the exempt principal be distributed. If the fund has undistributed profit from previous years, you must first tax the distribution with withholding tax until this profit is exhausted on the books.

If the beneficiary is an unrelated person, the distribution is subject to taxation either as a share of profit or as other income. The exemption for relatives cannot be applied in this case, and the tax treatment depends on the legal structure of the payment.

Practical Risk: Incorrect Classification of Payouts

Tax authorities are increasingly focusing on whether payouts from family funds are disguised profit distributions that should have been taxed. The risk of a tax assessment in these cases is high.

For example, if a fund owns a property, collects rent, and then pays a beneficiary an amount designated as a "study grant," a problem may arise. The tax administrator may reclassify the payment as a share of profit and assess a 15% tax with associated penalties.

Differences Between a Family Foundation and a Trust Fund: How to Choose the Right Instrument

A foundation is a legal entity with a business identification number (IČO) and legal personality, which must have an endowment of at least CZK 500,000. Its bodies consist of a board of directors and a supervisory board, with the founder able to reserve influence in the statute. A foundation is subject to mandatory registration in a public register and is suitable for larger asset holdings.

A trust fund is registered in the Register of Trust Funds and offers a high degree of flexibility and lower administrative complexity. It has no legal personality, the assets are managed by a trustee, and it does not require a minimum contribution. It is suitable for more discreet management, as some data in the register is not public.

From a tax perspective, both instruments are equal, as both are subject to corporate income tax at a rate of 21%. The decision between a foundation and a trust fund is therefore primarily a matter of legal strategy and administrative preference.

Distributing Dividends Through a Fund: The Parent Company Regime

One of the key tax optimization tools is the use of dividend exemption. If a family foundation owns a share in a business corporation, it can receive dividends without withholding tax.

To do this, it is necessary to meet the conditions implemented by the EU Parent-Subsidiary Directive. The main conditions include holding at least a 10% share in the share capital for a minimum of 12 months and the corresponding legal form of tax residents in the EU.

A trust fund must be able to prove that it meets the definition of a parent company for tax exemption purposes. It is often forgotten that a fund lacks legal personality, which can be more complicated in an international context when applying for an exemption than it is for a foundation.

Threats and Penalties: The Risks of Making Mistakes

For non-payment of tax, for example, due to a missing withholding, there is a risk of a tax assessment along with a penalty of 20% of the assessed amount. In addition, late payment interest is charged, which corresponds to the CNB repo rate increased by 8 percentage points per year.

If you fail to file a tax return on time, you face a fine of 0.05% of the assessed tax for each day of delay. This penalty can reach up to 5% of the total tax, which is a significant amount for larger assets.

Another risk is the ineffectiveness of a legal act if assets were transferred to the fund with the intent to defraud creditors. Creditors can invoke contestability in court and satisfy their claims from the assets in the fund as if the contribution had never occurred.

Incorrect registration in the Register of Beneficial Owners of the fund carries a fine of up to CZK 500,000 and a ban on the distribution of profits. The Register of Beneficial Owners is strictly monitored, and errors in it can lead to the blocking of the fund's financial flows.

Final Summary

In 2026, family foundations and trust funds will continue to be an effective tool for intergenerational capital transfer. However, the increase in the corporate income tax rate to 21% and the tightening of rules for tax exemptions for family foundations require much more careful planning than before.

The lawyers and tax advisors at ARROWS law firm specialize in asset protection and tax law. If you are unsure about the setup of your fund, don't take risks and contact us at consultation@arws.cz.