Family foundation – a new CIT taxpayer

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:

1. the family foundation is a taxpayer in respect of benefits provided to beneficiaries,
2. 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,
3. 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,
4. 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.

Author

Piotr Magda

Radca prawny, Senior Associate

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 →