The institution of trusts was introduced into the Czech legal system along with the new Czech Civil Code as of January 1, 2014.
Essence of a Czech trust
A trust is a purpose-specific pool of assets without legal personality, which the owner has transferred to a trustee for administration, either through a contract or a testamentary disposition (e.g. a will). A trust comes into existence when the trustee accepts the obligation to manage the assets within the trust, or upon the death of the settlor, if the trust was established by a testamentary disposition. Upon the formation of the trust, the settlor essentially loses direct control over the allocated assets.
The assets in a trust may be allocated for either a public-benefit purpose or a private purpose, such as investment optimization, employee compensation, intergenerational asset transfer to children, financial security for retirement, etc.
Personnel staffing of a Czech trust
The establishment, management, and supervision of a trust involve three persons: the settlor, the trustee, and the beneficiary.
The settlor is a natural person or a legal entity who allocates their property into the trust for a specific purpose and appoints a trustee to manage this property.
The trustee performs full administration of the allocated property. Except as provided by law, only a legally competent natural person may act as a trustee. The trustee acts in their own name on behalf of the trust. Under certain conditions, the settlor or the beneficiary may also serve as the trustee.
The beneficiary is a person who has the right to receive distributions from the trust.
The owner of the assets in the trust is neither the settlor, the trustee, nor the beneficiary. Supervision over the trust is usually performed by the settlor and the beneficiary.
A trust, by its nature, is similar to a foundation. Unlike a foundation, however, a trust is not registered in a public register, its duration is generally limited in time, and it is not as constrained by certain legal limitations.
Czech trust statute
The fundamental document governing the administration of the trust is its statute. The statute is issued by the settlor. It must take the form of a public deed — a notarial record. The statute addresses key issues of trust operation — identification of the allocated assets, the purpose of the trust, identification of the beneficiary, and conditions for distributions to the beneficiary (e.g. reaching the age of majority or graduating from university).
As of January 1, 2018, new legal regulations took effect, introducing the obligation to register trusts in a special register. A trust will come into existence only upon registration in the trust register. However, if the trust is established by a testamentary disposition, it will come into existence upon the death of the testator and will subsequently be registered. Not only the trust itself but also additional information, including the designation of the beneficiary of a trust established for a private purpose, will be recorded in the register. The identity of the beneficiary will be entered only in the non-public part of the register, accessible only to authorities and bodies specified by law. For a trust that was established before January 1, 2018, an application for registration in the trust register must be submitted by June 30, 2018, at the latest, otherwise the administration of the trust will terminate.
Selected legal and tax aspects of Czech trusts in brief:
- They provide relative discretion for the settlor and the beneficiary, as only the trustee is recorded as the owner of the allocated property in the land register, other public lists, and registers, with the annotation “trustee”; however, the settlor, trustee, and beneficiary must be identified under anti-money laundering laws,
- They facilitate intergenerational asset transfer and preservation by reducing the risk of dilution of asset value among heirs and leaving the asset management as a whole to a third party—the trustee,
- They offer an alternative to inheritance by allowing uneven distribution of the settlor's assets not only during their lifetime but also after death; such allocated assets are not part of probate proceedings after the settlor's death,
- They are accounting entities and subject to corporate income tax just like legal entities (even though they lack legal personality),
- They can become VAT payers,
- The allocation of assets into a trust itself is not subject to corporate income tax or real estate acquisition tax,
- Distributions from trust profits (after taxation) are subject to a 15% withholding tax,
- Income of a beneficiary who is a natural person is subject to 15% personal income tax, unless a statutory exemption applies (e.g. a close family relationship between the settlor and the beneficiary as defined by law),
- Income received by the beneficiary from a trust is exempt from income tax if it concerns property allocated to the trust through a testamentary disposition,
- An amendment to the Income Tax Act (http://www.psp.cz/sqw/historie.sqw?o=7&t=873) introduces the addition of Section 19 paragraph 3(b) granting exemption from income tax on profit shares paid to a trust. The exemption is applied under similar conditions as for business corporations.
For more information, please do not hesitate to contact us at:
JUDr. Mojmír Ježek, Ph.D.
ECOVIS ježek, advokátní kancelář s.r.o.
Betlémské nám. 6
110 00 Praha 1
e-mail: mojmir.jezek@ecovislegal.cz
www.ecovislegal.cz
O ECOVIS ježek, advokátní kancelář s.r.o.
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