Several tax traps have been set in the new law on family foundations

The law on family foundations will come into effect on May 22nd of this year. However, it has already been amended. 

"The changes to the taxation rules are mostly favorable. But one concept can seriously complicate the operation of a foundation. If the founder, beneficiary, or related entities decide to manage it for a fee, a so-called hidden profit will arise, which will need to be taxed,” Ewa Flor, a tax advisor, said.

Conversely, the founder's gratuitous provision will generate income. Thus, any form of involvement in the management will affect its taxation with corporate income tax. The introduced changes will undoubtedly tighten the law, but they also raise a number of interpretative doubts. Confused entrepreneurs may hold off on investment or business decisions. It may also lead to situations where they start looking for loopholes in unclear and difficult-to-apply regulations.

“At this moment, it is difficult to predict whether the institution of a family foundation will lose interest among entrepreneurs. However, the issue of hidden profits can certainly be a factor that discourages taxpayers from establishing it. It may share the fate of Estonian corporate income tax, which initially did not enjoy popularity due to the lack of established interpretive guidelines and complexity of the regulations,” Ewa Flor added.

(WBJ)