Your salesperson may say that the trust they're selling is “outside the system,” but this does not apply in the Czech Republic
UK expats are often subject to the sales pitch, “Put your assets into a trust, wrap it in life insurance, and you will legally avoid Inheritance Tax.” I have just been watching an online discussion about a very large international advice firm who are recommending an inappropriate trust structure to a South African resident- which could end in disaster. In the Czech context, this construction often comes up against the harsh reality of laws that treat such structures completely differently than the promises of the offshore salesperson. And this is where the problem begins.
Czech Republic: Trust is not invisible
Unlike some “offshore presentations”, the Czech legal and tax system definitely does not ignore trusts. On the contrary, trust funds are registered in the trust fund registry and there is an obligation to identify the beneficial owners. Such structures are subject to tax transparency and control.
If you are a tax resident of the Czech Republic, the authorities will not ask where the trust was established. They will address its relationship to you.
A foreign trust may not be fully respected in Czech inheritance proceedings and the result could be delays, legal uncertainty and potential taxation that no one expected.
And the salesperson’s world ends where yours begins, at the Czech tax office.
Registration and Supervision Obligation
If a foreign trust has a connection to the Czech Republic (e.g. the founder (settlor), beneficiary, or trustee is a Czech resident), there may be an obligation to register the structure in the register of beneficial owners and, in some cases, also in the register of trust funds. Ignoring these obligations is not a small matter. Sanctions can be high and, in extreme cases, the disposal of assets may be impossible.
Tax reality: A trust has its own tax life
One of the biggest illusions of offshore sales is that a trust is “outside the system” but this does not apply in the Czech Republic.
Trusts and foreign trusts may have-
- Own tax liability
- Obligation to file tax returns in the Czech Republic
- Obligation to tax income (e.g. income from investments or insurance products)
In addition, payments to beneficiaries may be taxed as income and so some structures may lead to double taxation. And if you think that life insurance within the trust will “protect” everything, Czech authorities often apply the principle of looking at the economic substance, not the legal envelope. And this “Look-through” approach is where the structure falls apart.
The Czech tax authorities, like other European authorities, may ignore the trust as a separate entity, consider the assets still owned by the founder (settlor) and tax the income as if the trust did not exist at all.
This is a major risk, especially in structures where the founder has retained control, is also the beneficiary and has de facto influence on investments. In such a case, the “protection property” can turn into a fully taxable problem.
Inheritance in the Czech Republic: An unpleasant surprise
The Czech Republic does not have a classic Inheritance Tax, but inheritance income may be taxable in some cases and disputes may arise about the inclusion of property in the estate. A foreign trust may not be fully respected in Czech inheritance proceedings and the result could be delays, legal uncertainty, and potential taxation that no one expected.
The problem of sales: Product instead of advice
A large part of these structures are sold by people who know nothing about Czech law, are not around to deal with Czech tax implications and are paid a commission for the product sale (invariably an offshore insurance bond from The Channel Islands, The Isle of Man, or some other tax haven). The sale of these is usually not legal in the Czech Republic. And the salesperson’s world ends where yours begins, at the Czech tax office.
Why professional advice is key
Before you enter into any trust structure, you need an advisor who has an understanding of Czech tax law, understands international overlaps, and is not motivated by selling a specific product. First, they will explain why it might not work and the hard truth for those who have been sold such structures (as well as offshore insurance bonds outside of a trust).
Work with professionals in the Czech Republic
We are the experts who people call to sort out their investments, pensions, and financial products after commission-based salespeople have led them astray.
Summary
Many of these structures that have been sold/advertised in the Czech environment are a potential source of tax and legal problems and should be avoided. And, if some salesperson tells you otherwise? Then they are probably not solving your problems, they are solving their commission targets.
