Tax Risks and Safe Structuring of Family Foundations and Trust Funds

Mgr. Daniel Půlpán
Mgr. Daniel Půlpán
25.3.2026 | ARROWS law firm

Family foundations and trust funds are popular tools for asset protection, which entrepreneurs use to avoid probate proceedings as well as family disputes. However, if you do not set up the funds correctly or align the distribution rules with tax laws, you risk additional tax assessments and penalties. In this article, we will show you specific tax boundaries and how to navigate this complex area safely.

The illustrative image shows a lawyer during a consultation regarding the tax structuring of trust funds.

Key takeaways
  • Tax regime: Family foundations and trust funds are subject to Czech corporate income tax at 21%, not 19% as in the past.
  • Payments to beneficiaries: Profit distributions (income from assets) are subject to 15% withholding tax. If it is the transfer of the assets themselves (a gratuitous benefit), it is subject to Czech personal income tax (15% or 23%); however, for benefits provided to family members, a full tax exemption may be available if the statutory conditions are met. It is therefore crucial to strictly distinguish between profit distributions and transfers of assets.
  • Dividends: Dividends from subsidiaries may be exempt from tax in a foundation if you meet the conditions of the parent-subsidiary regime. The complexity lies in setting up and documenting these conditions correctly.
  • Risks: An incorrect legal form of the fund, unclear rules in the charter, or an attempt to prejudice creditors may lead to the ineffectiveness of the legal act and additional tax assessments, including penalties.

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. Czech legislation distinguishes, in the area of asset administration, primarily a foundation (or a foundation fund) and a trust fund. The difference is fundamental, because it results in different legal and administrative obligations.

A foundation is a legal entity with its own legal personality, which can own assets and enter into contracts. A foundation must be established by a notarial deed and you must contribute at least CZK 500,000 as the foundation endowment. Once the foundation is entered in the Foundation Register, it acquires legal personality and automatically becomes a Czech corporate income tax payer.

A trust fund, by contrast, is an entity without legal personality. The assets in the fund are “ownerless assets”, i.e., they do not belong to the settlor, the trustee, or the beneficiaries. From a procedural perspective, the trustee acts on behalf of the fund, but for tax purposes a trust fund is treated as a Czech 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 requires a precise charter. The practical consequence is that a foundation must be entered in a public register and is subject to stricter formal oversight.

Both a foundation and a trust fund may have a family character, meaning that 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 engaged in charitable activities.

Tax burden of the fund: What is taxed and what is not

The most common mistake is the assumption that a family fund is a tax haven. A fund (a foundation or a trust fund) is subject to Czech corporate income tax. The tax rate is currently 21%, which represents an increase from the previous 19% under the consolidation package.

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

A family foundation that does not serve a public-benefit purpose does not automatically have investment income exempt. In the past, foundations benefited from a broad exemption for income from the foundation endowment, but the current rules distinguish between public-benefit and private foundations. Income from interest, rent, or the sale of securities is subject to the standard 21% tax.

All ordinary income, such as rental income from real estate or capital gains, is taxed at 21%. If the fund sells real estate or an interest in a third company outside an exemption regime, it is taxable income.

Unlike individuals, funds do not benefit from a general time test for exemption. The sale of real estate is therefore always taxable for a fund, regardless of the holding period.

However, the situation for ownership interests and shares is different and very tax-efficient. If the fund sells an interest in a subsidiary (holding at least 10% for more than 12 months), the gain is fully exempt. As a result, taxation primarily applies only to sales of small portfolio investments (below a 10% interest).

Tax advantages of family foundations and trust funds: Where optimisation makes sense

Why, then, do entrepreneurs establish these structures? The main advantages lie in asset protection, continuity of administration, and a specific regime for payments to family members that offers certain tax reliefs.

If a family fund pays funds to a beneficiary, this benefit is exempt from Czech personal income tax for the beneficiary. This applies if the beneficiary is a relative in the direct line or collateral line in relation to the person who contributed the assets to the fund. However, it is necessary to distinguish between benefits paid out of profit and benefits paid out of assets.

The second advantage is that assets in a foundation or trust fund do not go through probate proceedings upon the settlor’s death. Probate involves notary fees, delays, and the risk of disputes, whereas assets in a fund are administered continuously in accordance with the charter.

The settlor’s creditors cannot directly reach the assets, except in situations where the contribution to the fund could be challenged as prejudicing creditors. The assets in the fund are legally separated from the settlor’s assets, providing enhanced asset protection.

The fourth advantage is flexibility of administration, because a foundation or fund makes it possible to set rules for dealing with assets across generations. Simple inheritance does not allow the same degree of control and long-term planning.

Related questions on the tax status of family funds

1. What is the difference between a family foundation and a trust fund from a tax perspective?
The basic tax rate is 21% for both. Both are treated as Czech corporate income tax payers. The differences are mainly legal and administrative, not in the tax rate.

2. If I contribute an interest in an s.r.o. to a foundation, will I pay tax?
A contribution (allocation) of assets to a foundation or fund is not a taxable transfer if made gratuitously. No income tax is payable.

3. If all beneficiaries are my siblings, are all payouts tax-free?
Caution is needed here. If it is a gratuitous receipt from a fund that was created from assets contributed by a relative, it is exempt at the level of the beneficiary. However, if it is a share in the profit generated by the fund, withholding tax applies.

You can clarify all of these questions with the attorneys at ARROWS law firm in Prague at office@arws.cz.

Payout of funds to beneficiaries: When it is taxed and how much

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

The fund must withhold withholding tax at 15%, or potentially higher for non-residents without a tax treaty, if it pays out a share of profit. If the fund generated profit from rent or dividends and pays out that profit, it is income from capital assets and this tax is final.

If the fund does not withhold the tax and pays out the full amount, the tax authority will assess the tax to the fund, including penalties and late-payment interest. It is therefore essential to have properly set accounting that records these flows.

If the beneficiary receives a payment that is not a share of profit but, in substance, a drawdown of the fund’s corpus, this income is exempt for the beneficiary. This applies where the beneficiary is a related party of the founder and it is therefore a return of principal.

However, the Income Taxes Act provides a legal fiction that profit is always paid out first, and only after it has been exhausted can exempt principal be paid out. If the fund has retained earnings from previous years, you must first tax the payout with withholding tax until you exhaust that profit in the accounts.

If the beneficiary is an unrelated person, the payout is taxable 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 payout.

Related questions on payouts from a trust fund and taxation

1. What is the withholding tax rate if a payout is made from the fund to a foreign individual?
Typically 15% or 35% (for countries outside the EU/EEA without a tax treaty and exchange of information). The specific rate depends on the double tax treaty with the relevant country.

2. If a beneficiary receives a payout, do they have to file a tax return?
If withholding tax was applied, the tax liability is settled and it is not reported in the return. If it is exempt income (e.g., within the family), it is not reported in the return either, but if the amount exceeds CZK 5 million, the beneficiary must file a notification of exempt income.

Practical risk: Incorrect classification of a payout

The tax authorities are increasingly focusing on whether payouts from family funds are not a disguised profit distribution that should have been taxed. The risk of additional assessment is high in these cases.

For example, if the fund owns real estate, collects rent, and then pays the beneficiary an amount described as a “study allowance”, an issue may arise. The tax administrator may reclassify the payout as a share of profit and assess 15% tax plus accessories.

Possible issues

How ARROWS helps (office@arws.cz)

Incorrect classification of a payout – Confusion between taxable profit and exempt payment; risk of additional tax assessment.

Legal analysis of the nature of the payout and a tax opinion; preparation of documentation for a potential audit.

Insufficient accounting – Inability to prove whether profit or principal is being paid out.

Arranging an audit and setting up the fund’s correct accounting procedures.

International taxation – Beneficiary abroad or assets abroad.

Consultation on double tax treaties and CFC rules.

Omission of withholding tax – The trustee does not withhold the tax and remit it to the state.

Setting up internal compliance processes and representation in tax proceedings.

Differences between a family foundation and a trust fund: How to choose the right instrument

A foundation is a legal entity with an identification number (IČO) and legal personality, which must have endowment capital of at least CZK 500,000. Its bodies consist of a board of directors and a supervisory board, and the founder may reserve influence in the statutes. A foundation is subject to mandatory registration in the 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 burden. It does not have legal personality; the assets are administered by a trustee and no minimum contribution is required. It is suitable for more discreet administration because part of the data in the register is not public.

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

Paying dividends through a fund: Parent company regime

One of the key tax optimisation tools is the use of the dividend exemption. If a family foundation holds an interest in a business corporation, it can receive dividends without withholding tax.

To do so, 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 registered capital for at least 12 months and the appropriate legal form of EU tax residents.

The trust fund must be able to demonstrate that it meets the definition of a parent company for the purposes of the tax exemption. It is often overlooked that a trust fund does not have legal personality, which can make claiming the exemption more complex in an international context than for a foundation.

Threats and sanctions: What you face if mistakes are made

For failure to remit tax, for example due to missing withholding, there is a risk of additional tax assessment together with a penalty of 20% of the additionally assessed amount. In addition, late-payment interest applies, corresponding to the CNB repo rate increased by 8 percentage points per year.

If you do not file a tax return on time, you face a penalty of 0.05% of the assessed tax for each day of delay. This sanction can reach up to 5% of the total tax, which for larger assets represents a non-negligible amount.

Another risk is the ineffectiveness of a legal act if assets were transferred into the fund with the intent to prejudice creditors. Creditors may claim avoidability in court and satisfy themselves from the assets in the fund as if the contribution had never occurred.

If the fund’s registration in the Register of Beneficial Owners is incorrect, there is a risk of a fine of up to CZK 500,000 and a ban on paying out a share of profit. The Register of Beneficial Owners is closely monitored, and errors in it may lead to the fund’s financial flows being blocked.

Final summary

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

Lawyers and tax advisors from ARROWS advokátní kancelář specialize in asset protection and tax law under Czech legislation. If you are not sure about the setup of your fund, do not take risks and contact us at office@arws.cz.

FAQ – Most frequently asked questions about family foundations and trust funds 2026

1. What is the minimum contribution to a foundation?
For a foundation, the statutory minimum endowment capital is CZK 500,000. A trust fund has no statutory minimum, but for efficient administration higher amounts are recommended so that returns cover the costs of administration.

2. Can I, as the founder, retain control?
Yes, through a properly drafted deed, membership on the board of directors, or the role of protector in a trust fund. However, it is necessary to ensure that the fund is not merely an “empty shell”, which could lead to it being challenged.

3. How are payments to employees or partners from the fund taxed?
If the beneficiary is not a related person, the payment is subject to taxation (typically 15% withholding tax on a profit share, or taxation as part of salary if there is a link to employment).

4. What if the fund makes a loss?
A tax loss may be applied in the following 5 taxable periods against future profits. However, profits that do not exist cannot be distributed to beneficiaries.

5. How to defend yourself during a tax authority audit?
The basis is perfect documentation (deed, trustee’s decisions, accounting). If the authority has doubts, it is necessary to respond in a qualified manner, ideally through an attorney.

Notice: The information contained in this article is of a general informational nature only and serves for basic orientation in the matter under the legal status as of 2026. Although we take utmost care to ensure maximum accuracy of the content, legal regulations and their interpretation evolve over time. We are ARROWS advokátní kancelář, an entity registered with the Czech Bar Association (our supervisory authority), and for maximum client security we are insured for professional liability with a limit of CZK 400,000,000. To verify the current wording of regulations and their application to your specific situation, it is necessary to contact ARROWS advokátní kancelář directly (office@arws.cz). We accept no liability for any damages arising from independent use of the information in this article without prior individual legal consultation.

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