Table of Contents:
- What is the Basis for This?
- The Foundation as an Active Manager
- What Tax Benefits Does This Solution Offer?
- Summary
Family Foundations in Holding Structures
Family foundations can be and are used to build holding structures. Shares and stakes in family companies are transferred to the foundation’s assets. If there are several such companies, the foundation becomes a holding platform managing the operational companies. A family foundation is not just a passive beneficiary of the income generated by the portfolio companies but also actively manages and builds development strategies for each of the portfolio companies.
What is the Basis for This?
According to Article 5 of the Family Foundation Act, the foundation may conduct business activities, but in a limited scope, which includes:
- Selling property, provided that the property was not acquired solely for resale;
- Renting, leasing, or making property available for use on another basis;
- Joining commercial companies, investment funds, cooperatives, and similar entities, whether domestic or foreign, and participating in these companies, funds, cooperatives, and entities;
- Buying and selling securities, derivatives, and similar rights;
- Providing loans to:
- Capital companies in which the family foundation holds shares or stakes,
- Partnerships in which the family foundation participates as a partner,
- Beneficiaries;
- Handling foreign payment instruments belonging to the family foundation for the purpose of making payments related to the foundation’s activities;
- Producing processed plant and animal products in a non-industrial manner, except for processed plant and animal products obtained as part of special agricultural production and products subject to excise tax, provided that the amount of plant or animal products from own cultivation, breeding, or raising used to produce a given product constitutes at least 50% of that product;
- Forest management.
The Foundation as an Active Manager
The Family Foundation Act thus provides that a family foundation can participate in companies, investment funds, and other vehicles. The foundation can be particularly the sole or majority shareholder or partner in portfolio companies, where it appoints the composition of the management and supervisory bodies.
The enacted provisions regarding family foundations do not contain any restrictions on the foundation’s participation in commercial companies.
This results in the possibility of making the foundation a participant in a holding structure where the foundation will be the holding entity, and the family business will be a subsidiary.
Consequently, by acquiring shares or stakes in family businesses, the family foundation will be entitled to receive dividends from the ownership rights.
What Tax Benefits Does This Solution Offer?
The foundation is generally exempt from corporate income tax. Accordingly, profits earned by the foundation from dividends received from subsidiaries and the sale of shares and stakes in these companies are also tax-exempt. Taxation arises only when funds are distributed to the foundation’s beneficiaries. In the case of payments to beneficiaries, the family foundation is subject to a 15% CIT, with the possibility of deducting this tax when disbursing funds to the beneficiaries.
It should be noted, however, that a company whose shareholder is a family foundation cannot simultaneously benefit from the Estonian CIT.
Summary
To sum up, the possibility of conducting business activities by a family foundation allows it to be used as a holding entity, where the family wealth will be accumulated and gradually increased by successive generations.
