Slovaks and czech trust fund.

Slovak entrepreneurs and property owners are increasingly opting to establish trust funds in the Czech Republic. This trend is driven by the fact that Slovakia currently lacks a comprehensive and flexible legal framework for trusts that would allow for effective intergenerational transfer and long-term asset management comparable to the Czech regulations. The Czech Republic has thus become a logical choice due to its proximity, linguistic commonality, and stable legal environment.

Why Slovaks Choose Czech Trust Funds

In Slovakia, the number of Slovak entrepreneurs turning to Czech lawyers with requests to establish a trust fund has significantly increased in recent years. This trend has been strengthened by the need for asset protection in an era of global instability and generational succession in family businesses. Owners fear the fragmentation of assets in inheritance or risks associated with business activities and are seeking a robust legal instrument to protect the integrity of family wealth.

Although Slovak law includes provisions for foundations, these are primarily focused on public benefit purposes, and the Czech trust fund continues to offer a higher degree of flexibility, anonymity, and legal certainty.

The Czech Republic has become a natural choice not only due to geographical proximity and the absence of a language barrier but also because a functional legal framework has existed in the Civil Code since 2014. Experts from ARROWS Law Firm have been dealing with this issue for a long time and understand the specific conflict-of-law issues that a Slovak client faces.

Legislative Environment – What a Slovak Citizen Needs to Know

The Czech trust fund is regulated by the Civil Code (Act No. 89/2012 Coll., Civil Code, Sections 1448–1474). It is a pool of assets set aside for a specific purpose that lacks legal personality, which is a fundamental difference compared to business corporations. The founder sets aside the assets, the trustee manages them in their own name on behalf of the fund, and the beneficiaries receive distributions from it.

For a Slovak citizen, it is crucial that the internal affairs of the fund are governed by Czech law; it is established by a statute in the form of a notarial deed and comes into existence only upon registration in the Register of Trust Funds. A Slovak citizen must also prove that they have the legal capacity to perform legal acts. The law does not require Czech citizenship or permanent residence in the Czech Republic; full legal capacity according to the law of the home state is sufficient.

Difference Between the Czech and Slovak Legal Environments

While the Czech Republic has a clearly defined institute of the trust fund, Slovak law does not recognize this specific institute in an identical form. This creates a specific situation for a Slovak resident when dealing with Slovak authorities. Assets in the fund cease to be the property of the founder and become "ownerless" property, which may be a new situation for Slovak authorities.

Lawyers from ARROWS Law Firm have experience in correctly structuring the fund so that it stands up in an international context. This knowledge is essential, particularly when proving the origin of assets and in tax reporting.

Recognition of the Fund in an International Context and Avoidance of Double Taxation

The Czech Republic has a Double Taxation Treaty concluded with Slovakia. A trust fund established in the Czech Republic with its place of management there is considered a Czech tax resident for tax purposes.

This has practical consequences, as the fund is subject to registration with the Czech Financial Administration, maintains accounting according to Czech regulations, and files tax returns there. However, the Slovak founder or beneficiary must address the impact on their personal tax sphere in Slovakia, especially regarding distributions received from the fund.

Tax Obligations for the Slovak Founder and the Fund

A trust fund in the Czech Republic is a corporate income tax payer. This means that income generated by the fund (e.g., from real estate rental, securities trading, interest) is subject to corporate income tax in the Czech Republic. The rate of this tax is 21% (applicable for tax periods starting from January 1, 2024). The gratuitous allocation of assets into the fund by the founder is generally not taxable income for the fund.

When paying distributions to a beneficiary in Slovakia, it is necessary to examine the nature of this income. If it is a share of profits, the Czech Republic standardly applies a withholding tax, which may be reduced under the Double Taxation Treaty, usually to 15%. The beneficiary can, under certain conditions, offset this tax against their tax liability in Slovakia. It is important to distinguish between the distribution of profit and the distribution of the original contribution, which may have a different tax regime.

Mgr. Jan Medek

associate, partner

• medek@arws.cz

JUDr. Ondřej Stehlík, LL.M., MBA

associate, partner

• stehlik@arws.cz

Tax Residency and Reporting to Authorities

A Slovak founder or beneficiary who is a tax resident of Slovakia is taxed on their worldwide income in Slovakia. Therefore, income from a Czech trust fund must be declared in their Slovak tax return. To avoid double taxation of the same income, methods for the avoidance of double taxation according to the valid international treaty are applied.

A problem arises if clients do not realize that their obligations do not end with the payment of withholding tax in the Czech Republic and neglect to declare the income in Slovakia. This can lead to additional tax assessments and penalties from the Slovak financial administration.

Registration Obligations and the Register of Beneficial Owners

The fund must register for income tax with the Czech tax office and fulfill obligations under the Act on the Register of Beneficial Owners. The trust fund must record its beneficial owner in this register, who is typically the founder, trustee, beneficiary, or persons exercising influence over the management of the fund.

Sanctions for failure to comply with the registration obligation in the Register of Beneficial Owners in the Czech Republic can reach up to CZK 500,000. Furthermore, a ban on the payment of profit shares or voting rights may occur, which can paralyze the fund.

MicroFAQ – Tax Obligations for the Slovak Founder

1. Does a Slovak citizen have to file a tax return in the Czech Republic and Slovakia?
The fund as such files a return in the Czech Republic. The Slovak citizen (beneficiary) files a return in Slovakia, where they state the income received from the fund. If tax was withheld in the Czech Republic, the mechanism for the avoidance of double taxation is applied. Lawyers from ARROWS Law Firm always recommend coordinating the procedure with tax advisors in both countries.

2. How is the fund's profit taxed?
Profit generated by the fund is subject to corporate income tax in the Czech Republic at a rate of 21%. Subsequent distribution of profit to the beneficiary is subject to withholding tax (usually 15% for Slovak residents, if the conditions of the double taxation treaty are met).

3. Are there sanctions for failing to report the fund?
Yes. In addition to tax sanctions, there are risks of fines for non-compliance with obligations regarding the register of beneficial owners (up to CZK 500,000) and Anti-Money Laundering (AML) measures. Slovak authorities may also assess additional tax on undeclared income, including late payment interest.

Practical Steps to Establishing a Fund

• Preparation and Analysis
  The first step is a thorough analysis of the founder's asset situation and goals. It is necessary to define the scope of the assets being set aside, the circle of beneficiaries and conditions for distributions, the duration of the fund, and the person of the trustee.
• Drafting the Statute
  The statute of a trust fund requires the form of a notarial deed. It contains mandatory requirements according to the Civil Code, but its individualization is key. The statute should be drafted in the Czech language to comply with the requirements of the Czech register and legal system.
• Selection of a Trustee
  The trustee can be any natural person with full legal capacity, or an investment company. If the founder is the trustee, the fund must have an additional, independent co-trustee (see Section 1456 of the Civil Code). The trustee performs full management of the assets and has fiduciary duties.
• Registration and Entry into the Register
  After signing the statute and the contract on the appointment of the trustee, registration in the Register of Trust Funds follows. The application for registration is usually submitted by a notary or the trustee. The fund legally comes into existence only upon registration, followed by tax registration and entry into the register of beneficial owners.

Most Common Mistakes and Risks

• Non-comprehensive Preparation of the Statute
  The use of general templates is highly risky for trust funds. A statute that does not account for the death of the founder, the removal of a trustee, or the resolution of disputes between beneficiaries can completely paralyze the fund in the future. For Slovak clients, a common mistake is insufficient provision for service of process and jurisdiction in case of disputes.
• Incorrect Tax Setup and Reporting
  Ignoring CFC rules (Controlled Foreign Company rules) or incorrect application of withholding tax are among the frequent errors. If the fund generates passive income, it may have specific impacts on the Slovak tax base of the founder even before the actual distribution of profit.
• Incorrect Identification of Beneficiaries
  A vague definition of beneficiaries ("my family") without a precise key for distributing benefits puts the trustee in an insoluble situation. Such a setup creates a risk of litigation regarding the invalidity of the statute due to uncertainty.

Most Common Problems and Their Solutions

How to Avoid Problems with Authorities

• Correct Registration and Compliance
  The basis is the precise execution of all registration steps, which include entry in the Register of Trust Funds, registration for income tax, entry in the Register of Beneficial Owners, and setting up accounting. ARROWS Law Firm guides clients through the entire process and monitors legal deadlines.
• Transparent Communication with Banks
  Given the strict AML regulations (Anti-Money Laundering Act), it is necessary to proactively provide the bank with the fund structure and the origin of the invested assets. Lack of transparency leads to an immediate refusal of services.
• Regular Review
  We recommend conducting a legal and tax review of the fund's operation at least once a year, especially considering frequent amendments to tax laws in both the Czech Republic and Slovakia.

MicroFAQ – Practical Issues to Address

1. Can a Slovak citizen be the sole trustee of a Czech fund?
Yes, but in such a case, the fund must have a second co-trustee who is neither the founder nor a person close to the founder, or the statute must be set up to meet the legal requirements for the separation of assets. If the founder is the sole trustee, the fund does not legally come into existence, or rather the management is not properly established (pursuant to Section 1456 of the NCC).

2. What happens to the fund if the founder moves away?
The fund remains a Czech tax resident (if the place of management is there). However, a change in the founder's residency changes their personal tax obligations regarding income from the fund in the new country of residence. This situation must be assessed according to the relevant international treaty.

3. Must the statute be written in Czech?
For the purposes of entry in the Czech register and the notarial deed, the primary language is Czech. It is possible to produce a bilingual version, but for interpretation and dealings with Czech authorities, the Czech version is decisive.

Conclusion

Establishing a Czech trust fund is an effective but technically demanding process for Slovak citizens. It is not merely about "filling out a form," but about creating a sophisticated legal structure that must withstand time, tax audits, and potential family disputes. Legal and tax aspects require a professional approach.

Lawyers from ARROWS Law Firm have extensive know-how in establishing and managing cross-border structures and eliminate risks at their inception.

If you are considering establishing a trust fund and want to be sure of the correct procedure, do not hesitate to contact us at office@arws.cz. ARROWS Law Firm has high professional liability insurance coverage in the hundreds of millions of crowns and guarantees expertise backed by years of practice.

FAQ – Most Frequent Legal Inquiries Regarding Establishing a Czech Trust Fund for a Slovak Citizen

1. Is it legal? Can a Slovak citizen establish a trust fund in the Czech Republic?
Yes, it is completely legal. Czech law does not restrict the nationality of the founder. The condition is the legal capacity of the founder and the legal origin of the assets.

2. What are the timeframes for establishing a fund?
The complete process from preparing the statute to registration in the register and tax registration usually takes 4–8 weeks, depending on the complexity of the structure and the speed of providing documentation.

3. How much does it cost to establish and operate a fund?
Establishment costs include legal fees, notary fees (which depend on the amount of assets being invested), and administrative fees. Operating costs then include accounting and any professional trustee fees. For a specific calculation, contact us at office@arws.cz.

4. What happens to the fund if the law changes?
Funds are governed by current legislation. If the law is amended, it may be necessary to adjust the fund's statute to comply with new regulations. We monitor legislative developments for you.

5. Can I take the assets back from the fund later?
Standardly, the allocation of assets is irrevocable if the fund is to fulfill a protective function. It is possible to set up the statute so that assets can be returned under certain conditions, but this may weaken the protection of assets against creditors. This is a strategic decision that needs to be consulted.

6. What happens if the Slovak citizen (founder) dies?
The fund does not cease to exist. Asset management continues according to the rules specified in the statute. This is one of the main advantages of the fund – it serves as a tool for the smooth transfer of assets to the next generation without lengthy probate proceedings regarding the assets in the fund.

Disclaimer: The information contained in this article is for general informative purposes only and serves as a basic orientation in the issue. Although we ensure maximum accuracy of the content, legal regulations and their interpretation evolve over time. To verify the current wording of regulations and their application to your specific situation, it is therefore necessary to contact ARROWS Law Firm directly (office@arws.cz). We bear no responsibility for any damages or complications arising from the independent use of information from this article without our prior individual legal consultation and professional assessment. Each case requires a tailor-made solution, so do not hesitate to contact us.