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.
Frequently asked questions
Does a family foundation pay corporate income tax during its existence?
A family foundation is exempt from corporate income tax until the moment of payment of funds to beneficiaries or transfer of assets to them as a result of liquidation. Taxation occurs only at the moment of distribution of funds and amounts to 15 percent at that time.
What are the rules for taxation of business activity conducted by a family foundation?
If the activity exceeds the scope provided for in the act, it is subject to taxation under general rules at a rate of 25 percent. In such a situation, the foundation also loses the possibility of using reliefs, such as the research and development activity relief or reliefs introduced by the Polish Deal.
Are benefits paid from a family foundation exempt from inheritance and gift tax?
Yes, a family foundation is excluded from taxation with inheritance and gift tax, provided that the benefit is paid to a beneficiary appearing on the list of beneficiaries of the foundation.
Which beneficiaries are exempt from personal income tax on payments from the foundation?
Persons belonging to the so-called zero group are exempt from personal income tax, i.e., spouses, ascendants, descendants, stepchildren, siblings, stepfather and stepmother. Other beneficiaries may be subject to taxation at other rates.
What changes in taxation of beneficiaries does the Public Finance Committee provide for?
The proposed changes aim to separate additional groups of taxpayers, which is intended to introduce a rate of 10 percent for certain categories of relatives. Currently, there is a dichotomy between exemption for the zero group and a rate of 15 percent for others.
Who is subject to taxation at a rate of 10 percent according to the proposed changes?
Beneficiaries from the first group will pay a rate of 10 percent, i.e., son-in-law, daughter-in-law and parents-in-law, as well as the second group comprising descendants of siblings, siblings of parents and specified spouses. This group no longer includes close relatives covered by the exemption.
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