The question of intergenerational exchange in the family businesses has been solved by numerous Slovak families via allocation of their assets to a Czech trust fund. Such allocated assets are usually business shares, e. g. shares in family companies. It must be pointed out, that Slovak legislation doesn’t recognise trust fund as we know it from the Czech Republic. Thus, in practice, many questions on how to treat the taxation of dividends payment from Slovak companies on behalf of the trust fund, or the subsequent payments of „shares on profit“ (note: these are not dividends in the strict sense) from the trust fund on the behalf of its beneficiaries arise.
Hence, we decided to summarise tax opinions to tax questions from the Financial Administration of the Slovak Republic. Although, we don’t wholly agree with some of the conclusions of the Financial Administration of the Slovak Republic, we consider that it is important to share their view of the matter.
Dividends paid by a Slovak company for the benefit of a Czech trust fund
A trust fund has no legal personality, is not tax transparent and for the purposes of Double taxation convention with the Czech Republic (hereby “DTC”) is considered as a tax resident of the Czech Republic. Dividends paid to a Czech fund administrator, whose final beneficiary is a trust fund without legal personality, are taxed via their administrator who is a taxpayer of such dividends. Since the trust fund is a person who is not a final beneficiary of the dividends paid, a trust fund is a final beneficiary of the dividends paid, but it is not a person who has a legal personality, a provision of § 43 par. 25 of the Income Tax Act (hereby “ITA”) should be applied, and under which the taxpayer (e.g., paying Slovak limited liability company) paying taxable dividends to a non-resident trust fund administrator will deduct a tax in the amount of 35% from these incomes.
However, according to the provision § 1 par. 2 of ITA, the above mentioned provisions of ITA won’t apply in an extent in which their application would lead to taxation that is not in accordance with DTC. In Art. 10 par. 1 and 2 of DTC, a regulation according to which dividends paid by a company that is a Slovak tax resident to a resident of the Czech Republic may be taxed in the territory of the Slovak Republic according to Slovak legislation exists. However, if the beneficial owner is a resident of the Czech Republic, then a tax imposed can’t exceed 5% or 15% of the gross amount of dividends in the cases provided by this provision.
The Czech trust fund is considered a legal person that is a subject to unlimited taxation in the territory of the Czech Republic and is considered a resident of the Czech Republic for the purposes of DTC according to Czech tax regulations. Therefore, the benefits of DTC apply to it. Due to the above mentioned reasons, if a real owner of the dividends paid and taxes via the trust fund administrator, is demonstrably trust fund which is a tax resident of the Czech Republic, the tax deducted by the Slovak company shall not exceed the amount of the “maximum tax” of 5% or 15%.
„Share on profit“ paid to Czech trust fund for the benefit of Slovak natural persons
Second frequently discussed topic is how to fiscally deal with the incomes earned by Slovak beneficiaries from the trust fund received e.g., from Slovak companies in the form of dividends and which are subsequently “distributed” among the beneficiaries. Please note that even though according to the Czech tax law, the trust fund is taxed similarly to a Czech company and the fund’s share on profit is taxed in the same way as dividends, it is not possible to set the level of dividend income based on a comparison of legal characteristics of the performance from the profit.
According to § 3 par. 1 letter e) of ITA, a dividend is a share of the profit paid by a company or a cooperative, which is a profit intended for distribution to persons who participate in their share capital or a member of the statutory body or a member of the supervisory body of this company or cooperative. It is true that a foreign person paying a similar income is also considered a business company or a cooperative.
Since the trust fund paying the mentioned performance doesn’t have a legal personality and is not considered a taxable person for the ITA purposes, the assets in the fund are anonymous, the fund’s beneficiary doesn’t own the property generating profit and in no way he participates in the share capital of this fund (the fund doesn’t create capital) and the performance from the fund’s profit does not represent the beneficiary’s income from holding the assets in the fund, the performance from the fund’s profit paid to the beneficiary of this fund does not represent an income similar to the income stated in in § 3 par. 1 letter e) of ITA.
As the performance from the fund’s profit doesn’t fall within the scope of income specified in § 5 to 7 of the ITA, the income of the fund beneficiary (Slovak tax resident) is income under § 8 of the ITA (other income) and is taxed directly by the taxpayer through a tax return filed by this taxpayer. Please note, that other income is subject to a tax rate of 19% or 25%. It is also important that the withholding tax deducted in the Czech Republic when paying this income in favour of Slovak tax residents can be offset against the amount of tax in the Slovak Republic.
Similar questions arise in connection with other family property management institutes used around the globe. We are glad that we could bring you a closer look to the summarized opinion of the Slovak financial administration on at least two issues related to the institute which is often used in our country due to the proximity of the Czech Republic. Please, don’t take the above as a binding tax opinion, but rather as an inspiration for the areas that should always be checked when implementing any structure to ensure the management of your family property and its intergenerational exchange.