Family foundation tax changes already enacted

In terms of taxation, the family foundation appears to be a highly advantageous solution, as it is exempt from corporation tax until funds are distributed to the foundation’s beneficiaries. These rules regarding the point at which the tax liability arises stem from the fact that the family foundation is subject to Estonian corporation tax.

In accordance with the above rule, a family foundation is subject to corporate income tax when it pays out benefits to beneficiaries or transfers assets to them as a result of liquidation. The tax rate will then be 15%.

Another important aspect is that if a family foundation engages in business activities that go beyond the scope provided for in the Family Foundation Act, such activities will not be exempt from corporation tax, which in such a situation means taxation under general rules. In this case, it should be noted that the tax rate in the described situation will be 25%. An additional limitation is the inability to apply the provisions of Articles 17–18f of the CIT Act, such as the relief for research and development activities, bad debt relief, or the reliefs introduced under the Polish Deal.

With regard to inheritance and gift tax, the family foundation will be exempt from taxation; however, for this exemption to apply, the foundation must make a payment to a beneficiary who appears on the foundation’s list of beneficiaries.

In the case of personal income tax, the amount of tax payable will depend on the beneficiary’s degree of kinship with the founder. Benefits and liquidation assets transferred to persons belonging to the so-called ‘0’ tax group (spouses, ascendants, descendants, stepchildren, siblings, stepfathers and stepmothers) will be exempt from personal income tax.

Despite the fact that the Act is due to come into force on 22 May 2023, the Public Finance Committee has already proposed amendments to the Act, under which an additional group of income tax payers would be established.

Under the current wording of the Family Foundation Act, a dichotomy is envisaged: either the beneficiary will be exempt from PIT as falling within the so-called ‘Group 0’ in relation to the founder, or taxation at a rate of 15% will apply.

Following the introduction of changes regarding the taxation of beneficiaries, additional Groups I and II of beneficiaries will be created, based on kinship to the founders as defined by the Inheritance and Gifts Act, to whom a tax rate of 10% would apply. For beneficiaries outside Group ‘0’ and Groups I and II, a rate of 15% is envisaged.

In summary, following the changes proposed by the Public Finance Committee, the taxation of foundation beneficiaries would be subject to the following rates:

• exemption from income tax: spouse, descendants, ascendants, stepchildren, siblings, stepfather and stepmother;
• 10% rate: (Group I:) son-in-law, daughter-in-law and parents-in-law, (Group II:) descendants of siblings, siblings of parents, descendants and spouses of stepchildren, spouses of siblings and siblings of spouses, spouses of siblings of spouses, spouses of other descendants;
• 15% rate: others.