There have been some important and positive changes to the tax treatment of Czech Trusts. These are especially helpful for clients who would like their trust to own shares in their family business, or indeed any other company.
A Major Positive Tax Change
25 April 2017
As many of you will be aware, there is a significant change to the tax rules relating to trusts currently awaiting signature by the President of the Czech Republic.
We are not tax advisers, so we are happy to provide a summary of the relevant changes prepared by PwC Czech Republic for APRSF – The Association for the Support and Development of Trust Funds. A copy of the summary is available here.
Why is this important?
It is important for a member of reasons, but the most significant is the fact that Trusts can now be used as the holding structure for companies and especially for family businesses.
We know from our own research that 74% of Czech Family business do not have a succession plan. And based on overseas data we expect that
- 70% of those businesses will fail to survive into the next generation (source Family Business Institute US), and
- 85% of those families will experience ‘serious family conflict’
This is a big problem, not just for those families, but also for the Czech economy and society as a whole.
When the founder of a business dies, the consequences are as follows:
- The business is owned by normally a group of family members. Normally these people have different priorities. In some cases they want the business to continue, but lack the majority shareholding they need to make sure this happens. More often, people just want the money. In a few cases, people who are not qualified to run the business will try to do so, and fail.
- The end result of this is usually that the business finishes, either through its sale or through its destruction
- Factories close. The staff lose their jobs. The wealth that has been accumulated over many years is destroyed.
For many family businesses in the rest of the world, Succession Planning is an integral part of their overall strategy – ranking in importance alongside their strategic and sales plans.
Such plans offer many positives:
- Family wealth is preserved,
- There is no ‘crisis’ in the business if something happens to the owner
- Senior management can be involved in the process and feel empowered
- They provide a pathway and plan to develop the skills of family members (or others) to the point that they are ready to take over control of the business
- Ownership can be passed on to the family, but control can be given to a separate group who have to follow rules and guidelines set by the business founder – even after his death
- Incompetent and or greedy family members can be prevented from attempting to run or destroy the business. Instead it is kept intact for the benefit of future generations
- Factories stay open and jobs are saved
The current tax changes give us a powerful tool. Now it is possible for a family trust to own a family businesses without negative tax consequences.
This means that, during his lifetime, the founder of the business can maintain complete control – nothing is affected in relation to the day to day operation of the business, but when something happens to the founder, or he retires, control is handed to the person or persons chosen by the founder – to manage the business in the best possible way, subject to the rules set by the founder, for the best interest of the family and for the business itself.
For more information on this new opportunity, please don’t hesitate to contact us.
