A family foundation is intended to be exempt from taxation to the extent that it carries out the activities described in Article 5 of the Family Foundation Act, which includes
- the disposal of property (provided that it was not acquired solely for the purpose of subsequent disposal),
- renting, leasing or making property available for use on other terms,
- joining commercial companies, investment funds, cooperatives and similar entities, whether based domestically or abroad, as well as holding interests in such companies, funds, cooperatives and entities,
- the acquisition and disposal of securities, derivatives and rights of a similar nature,
- granting loans to capital companies in which the family foundation holds shares, to partnerships in which the family foundation participates as a partner, and to beneficiaries,
- transactions involving foreign currency belonging to the family foundation for the purpose of making payments related to the family foundation’s activities,
- the production of plant and animal products processed by means other than industrial methods, with the exception of processed plant and animal products obtained within the framework of specialised agricultural production sectors and products subject to excise duty, provided that the quantity of plant or animal products derived from own cultivation, breeding or rearing, used in the production of a given product constitutes at least 50% of that product,
- forestry.
Consequently, a family foundation will be granted certain tax privileges. However, in respect of activities going beyond those described above, the foundation’s income is to be subject to a punitive, high tax rate of 25%.
The new regulations also provide for a number of exceptions to the CIT exemption granted to family foundations, specifying particular situations that directly result in corporate income tax liability, namely:
- the family foundation is a taxpayer in respect of benefits provided to beneficiaries,
- the family foundation derives income from a lease, tenancy or other similar agreement concerning an enterprise, an organised part of an enterprise or assets used to conduct business by the beneficiary, the founder or a related entity,
- failure to register with the register of family foundations within six months of the family foundation’s establishment, or where a decision by the registry court refusing registration has become final,
- the family foundation is a taxpayer liable for commercial property tax.
Furthermore, the amendments introduced by the Family Foundation Act to the CIT Act also indicate that a foundation’s entry into a general partnership results in that partnership becoming a CIT taxpayer by operation of law. The method of taxation of general partnerships previously applied remains unaffected by this situation.
It is also significant that the amendment to the Family Foundation Act provides that persons who are founders or beneficiaries of a family foundation may simultaneously remain partners in companies benefiting from the so-called Estonian CIT.
Frequently asked questions
Is a family foundation completely exempt from income tax?
A family foundation is exempt from CIT only with respect to activities specified in the act, such as disposal of assets, lease or making them available on other terms. In the case of conducting other activities, such income is taxed at a high rate of 25%. This means that tax privileges apply exclusively to specific activities listed in the provision.
In what situations does a family foundation lose the right to CIT exemption?
The exemption does not apply when the foundation is a taxpayer of tax on benefits for beneficiaries or on commercial buildings. It also loses it when generating income from leasing an enterprise or its part to the founder, beneficiary or related entity. Loss of exemption also occurs in case of failure to timely register or refusal of registration by the court.
Does a foundation’s joining a general partnership change its tax status?
Yes, a foundation’s joining a general partnership causes such partnership to become by operation of law a CIT taxpayer. However, this change does not affect the existing method of taxation previously applied to the general partnership itself.
Can founders and beneficiaries of a family foundation benefit from Estonian CIT?
Yes, the amendment to the family foundation act allows persons who are founders or beneficiaries to simultaneously remain partners in companies benefiting from the so-called Estonian CIT. This means that these two taxation systems can be applied jointly by the same persons.
A tax question or a dispute with the authorities?
That is where most conversations with a lawyer begin. A consultation is paid, PLN 600 net. You pay for a real opinion: whether you have a legal problem, what you can do about it and roughly what it costs. It ties you to nothing further, and you do not need to know the law, that part is on us.
- 1 Talk
You tell us what is going on, in your own words.
- 2 What next
We tell you your options and what it costs.
- 3 We act
You give the go-ahead and the matter is ours.
The practice includes ongoing advice on administrative and tax law. He has extensive experience in handling judicial, administrative, tax and judicial-administrative proceedings concerning both individual clients and business entities, including that gained through many years of providing services to local government units and other units of the public finance sector.
View profile →
