CZECH COMPANIES AND TRUSTS

AS VEHICLES FOR ASSET PROTECTION PURPOSES

OUR GROUP

part of a financial and consulting group formed in Prague in July 1992,

based in the Czech Rep., Slovakia and Cyprus,

leader on the Czech and Slovak markets of asset protection and international tax planning for more than 25 years.

OUR SERVICES

annual administration, bookkeeping, consulting services,

corporate services in the Czech Republic, Slovakia, Cyprus and Anguilla,

administration of trusts (Czech Republic) and foundations (Anguilla).

PROTTECO TRUST COMPANY

Our scope of activity

TYPICAL CLIENTS

professional clients from Ukraine, Kazakhstan, Russia, Poland etc.

MOST TYPICAL USE OF CZECH / SLOVAK COMPANIES

Czech/Slovak companies acting as agents in international trade,

Czech/Slovak holding companies,

Czech trusts used for holding of shares in Czech or international companies.

CZECH REPUBLIC – corporate tax regime (1)

TAX RESIDENCE resident companies are subject to corporate income tax on their worldwide income,

company is treated as resident if it has its legal seat or place of effective management in the Czech Rep.

TAX RATES corporate income tax - 19%, (effective taxation can be decreased in case of the use of agent structures),

VAT - standard rate of 21%, reduced rates of 15% and 10% (food, pharmaceuticals etc.).

CZECH REPUBLIC – corporate tax regime (2)

TAXATION OF INCOMING DIVIDENDS original EU Parent-Subsidiary implemented, i.e. dividends are tax exempt if standard conditions are met (10% shares, 12 months),

exemption applies also to dividends from non-EU subsidiaries which a) are tax resident in a country having a DTT with the CZ, b) are in a legal form comparable to a Czech joint-stock company or Ltd, c) in its country of residence, it is subject to a CIT at a rate of at least 12%, d) 12 months, 10% ownership, from 2017, the same exemption also applies to the dividend income of a Czech trust, anti-abuse amendment of the EU Parent-Subsidiary Directive (2015) not adopted into the Czech tax laws, but the general "substance-over-form rule" and "abuse of law" rules are present (never used in practice in case of holding structures).

CZECH REPUBLIC – corporate tax regime (3) PARTICIPATION EXEMPTION for capital gains from the sale of shares in EU as well as in non-EU subsidiaries, the tax

exemption applies under the same conditions as for the incoming dividends, from 2017, the same exemption also applies to Czech trusts,

if the conditions are not met, the capital gains are taxed by 19%.

CZECH REPUBLIC – corporate tax regime (3) OUTGOING DIVIDENDS/INTEREST/ROYALTIES tax exempt under the EU PS Directive (10% share, 12 months), or

reduced under a DTT,

otherwise the withhoding tax applies:

– 15% for EU residents and qualified non-EU residents, (i.e. existence of a DTT or TIEA between CZ and the country of residence of the recipient)

– 35% for non-qualified non-EU residents.

N.B.: for distribution of profit from the trust to the beneficiaries, the exemption does not apply!

CZECH REPUBLIC x UKRAINE

Agreement on the mutual promotion and protection of investments (1995, 2008),

Agreement on the legal assistance in civil matters (2002, 2008),

DTT (1999).

Dividends Interest Royalties

WHT rates 5 / 15% 5% 10%

Summary of benefits of Czech entities

TAX BENEFITS

participation exemption available, tax exemption of dividends received from EU / non-EU subsidiaries available, broad network of DTTs, including DTTs with UA, tax residence certificate issued automatically.

OTHER BENEFITS

Czech Republic / Slovakia = "white-listed" jurisdictions,

accounts in Czech banks available for Czech/Slovak companies with foreign owners, Czech trust as a new asset protection tool.

Typical structures with Czech companies

1. Czech trading agent company

2. Czech payment agent

3. Czech holding company

1. Czech trading agent company (1)

a special purpose company acting as an agent in its own name on behalf of a principal (usually based in a low-tax jurisdiction),

agent buys goods from foreign suppliers and resells them to final buyers, whereas the goods travels directly,

suitable alternative to a UK agent trading company,

perfect solution especially for an export from a non-EU country to a non EU-country.

N.B.:

in case of an export from the EU it is essential that the seller sells the goods in the regime of export out of the EU, in order to keep the transaction exempt from VAT,

can be used only in case that the financal statements fully reflect the movement of goods (the transactions on the bank account correspond with the agreements/invoices/bills of lading etc.).

1. Czech trading agent company (2)

Seller of goods CZ trading agent

Final buyer (Ukraine)

Invoices / payment Invoices / payment

Principal (low tax country)

Profit Commission

2. Czech payment agent (1)

the payment agent does not buy or sell goods, merely processes the payments upon instructions of a principal,

as a result, the principal does not have to have a bank account.

N.B.:

the provision of payment services provider is a regulated activity in the EU and the payment agent must dispose of a licence, UNLESS:

- the service is provided within a group of associated companies (with the commission agreed at arm‘s length basis), or - the payment service is done by a trustee of a Czech trust (individual), or - the payment service is done as a part of a complex intermediation service between the parties (the financal statements must fully reflect the movement of goods).

2. Czech payment agent (2)

Invoices / agreements

Payment instructions

Seller of goods

CZ / SK payment agent

Final buyer (Ukraine)

Invoices / agreements

Principal

Payment Payment

3. Czech holding company (1)

dividend income and capital gains received from qualified subsidiaries is not subject to

income tax:

a) EU subsidiaries meeting the 12 months, 10% ownership rule,

b) non-EU subsidiaries meeting the following requirements:

resident in a country having a DTT with the CZ,

legal form comparable to a Czech joint-stock company or Ltd,

subject to a CIT with a rate of at least 12% in its country of residence,

12 months, 10% ownership.

WHT does not apply in case of dividends paid to EU parent companies.

3. Czech holding company (2)

WHT 0%

Parent company resident in a DTT country

Exemption of incoming dividends Exemption of capital gains

Czech company

Qualified subsidiary

Qualified EU parent company

WHT 0% or further to the DTT

Other

WHT 19% or 35%

WHT 0% or further to the DTT

3. Czech holding company (3)

IMPLEMENTATION OF A SILENT PARTNER

enters into a confidential agreement with the shareholder,

provides the capital into the company (funds, shares etc.),

is entitled to the agreed part of the profit generated by the Czech company,

yet, the silent partner is not in a position of a shareholder and its identity is not known to the public.

CZECH TRUST

Czech trust TRUST CONCEPT IN THE CZECH REPUBLIC

introduced in 2014 by the new Czech Civil Code,

a founder assigns certain property (shares, real estate, liquid funds, receivables) to a trustee who

manages it for the benefit of specific or non-specific beneficiaries,

the trustee can be any individual (corporate trustees are not allowed as yet), no restrictions relating to the nationality, residence, or regulation of a trustee,

the founder can be an individual or a legal person. It can be the same person as

‐ the beneficiary (or one of them), ‐ a trustee but in such case, there must be more trustees appointed, acting jointly,

the beneficiaries can be specific individuals, specific legal persons, or just a generally determined

group of persons/entities. They do not have to be appointed or even to exist at the moment of establishment of the trust.

Czech trust

assets inserted into the Czech trust have no legal owner, (in official registries and banks, the trustee appears as an owner/shareholder, with an indication "as a trustee")

during the existence of the trust, additional assets can be vested into the same trust by the founder OR by a third party,

the trust legislation presumes the existence of a guardian/protector,

the trust is dissolved

- on expiry of the period for which it was established, - once the intended purpose is fulfilled, - on the decision of the court decision, or - if all beneficiaries renounce their right to receive payment from the trust,

the way of distribution of assets from the dissolved trust is determined by the statute. Usually, the assets are distributed to the beneficiaries or returned back to the founder.

Czech trust TAXATION profit is taxed in the same way as a corporation (income tax of 19%),

incoming dividends/capital gains are exempt under the same conditions as in case of companies, distribution of profit to the non-resident beneficiaries is subject to a WHT of 15%, unless a lower

rate applies thanks to a DTT,

distribution of assets to the beneficiaries depends on:

- whether the beneficiary is a related party (family, close relative etc.),

- whether the taxation of this type of income is exempt or the rate decreased by the DTT between the Czech Rep. and the country of residence of the beneficiary.

N.B.: According to the Ukraine-Czech DTT, for UA residents, this type of income is exempt in the Czech Rep. and taxable in Ukraine only).

Czech trust RECENT DEVELOPMENT

2014 - 2016 only a few Czech trusts have been established ,

banks, registries, authorities were not prepared for a concept of property without an owner.

2017

the Czech Minister of Finance "legitimised" the practical use of trusts by transferring all his

business assets to newly established trusts (in order to avoid his conflict of interest), the tax exemption relating to incoming dividends and capital gains was extended to trusts,

the number of Czech trusts quickly increased to more than 600.

Czech trust

January 2018 the official Registry of Trusts has been established as a part of the Commercial Registry, all trusts set up before 2018 have to complete the registration at the new Registry,

the existence of the Registry helps the trust arrangements to be better recognised by the

local and foreign authorities and banks.

Czech trust

Data/document regarding a trust Availability

name public

purpose public

data of creation and dissolution public

trustee public

settlor non-public

beneficiary or method of designation of the beneficiary non-public

protector non-public

AVAILABILITY OF INFORMATION IN THE REGISTRY OF TRUSTS

Czech trust

the assets in a Czech trust have no legal owner,

still, the law requires that the information about the “beneficial owner“ of the

trust is entered in the register of controlling persons (since January 2018)

(controlling person = the person having a possibility, factually or legally, to exercise, directly or indirectly, the ultimate effective control over a corporation, a trust or another legal arrangement without a legal personality)

AVAILABILITY OF INFORMATION IN THE REGISTRY OF CONTROLLING PERSONS

a controlling person of

A COMPANY

A TRUSTEE a controlling person of

A COMPANY the shares of which are transferred into

A TRUST

Czech trust

PURPOSES public benefit (with the main purpose not being generation of a profit) or

private purposes Private purposes connected with personal wealth:

protection of personal property from execution, seizure,

financial security of the settlor and his/her relatives,

protection of a suddenly acquired property from lighthearted dispositions,

protection of interests and essentials of living of a specific circle of beneficiaries,

transfer among generations and conservation of wealth,

maintenance of entirety of the wealth and protection of family assets,

tying the disbursement to certain conditions in case of studying / spendthrift children.

Czech trust

Purposes connected with the protection of business interests:

protection of business property from execution, seizure, asset-grabbing (raiderstvo),

confidentiality of ownership and origin of the entrusted property,

keeping ownership structures of business companies in anonymity,

distribution of assets among shareholders or other persons,

method of payment of employee bonuses,

protection from insolvency proceedings.

TRUST

settlor

HERITAGE

heirs-by-law

Directly owned property (shares, funds, real estate)

Indirectly owned property (shares, funds, real estate)

third party

Testament

inheritance proceedings

contribution by a third party

inserting of a part of the property

into a trust

STEP 1: SETTING UP

TRUST Shares in

a UA company Shares in

foreign companies

The trustee administers (or passively holds) the assets in the trust, with a due care,

in accordance with:

- the designed purpose of the trust, - the rules/obligations stipulated by the documentation establishing the trust

(statute, agreement on the administration of the property). The trustee is responsible for:

- registration of the trust for tax purposes, - the proper bookkeeping and filing of a tax return, - payment of the taxes (corporate income tax, VAT, property taxes)

STEP 2: ADMINISTRATION

TRUSTEE any individual

chosen by the client (family member, lawyer,

professional trustee)

The dividends paid by the UA company to the Czech trust will be taxed in Ukraine by a withholding tax of 10%. It will be not subject to tax in the Czech Rep.

the dividends paid by an EU company will not be taxed neither in the country of the company, nor in the Czech Rep.

the dividends paid by an offshore company and received by a Czech trust will be taxed in the Czech Rep. as a standard income, at a rate of 19%.

distribution of profit from the trust to the beneficiaries will be subject to the Czech withholding tax of 15% or a lower rate according to a DTT.

STEP 3: DISTRIBUTION OF PROFIT / ASSETS

dividend income

beneficiaries settlor himself

his children or relatives unrelated parties

TRUST Shares in

a UA company Shares in

foreign companies distribution of profit

STEP 4: TERMINATION OF A TRUST

Legal reasons for termination:

expiry of time,

meeting of a defined goal,

beneficiaries waive their rights to the profit and assets in the trust.

Other reasons for termination:

no property left in the trust,

other conditions stipulated in the statute (e.g. decision of a settlor).

The tax treatment of the distribution of assets depends on the countryof residence of the

beneficiary.

beneficiaries settlor himself

his children or relatives unrelated parties

TRUST Shares in

a UA company Shares in

foreign companies

distribution of assets

settlor if there are no

beneficiaries or the beneficiaries waive the

right to the property

EXAMPLE OF USE:

TRANSFER OF WEALTH AMONG GENERATIONS

Goal

to avoid transfer of accumulated wealth (shares, liquid funds) to “problematic“ persons in the event of an unexpected death of the settlor.

N.B.: Problematic (unwelcome) persons = potential heirs-at-law

suffering financial problems, or

having a spendthrift lifestyle or problematic relationships inside the family.

Risks to be solved

in the event of death of the property owners and subsequent inheritance proceedings, the estate may be forfeited to the benefit of creditors,

the accumulated wealth can be spent by one or more wasteful heirs,

the inheritance laws do not allow the owner to divide various assets among particular heirs in an optimal manner.

TRUST

the settlor can define conditions for the distribution of profits / property to the beneficiaries (e.g. bind it to certain conditions),

problematic persons can be omitted only temporarily (the settlor can define that they can acquire the property after they have solved their problems),

transfer of wealth to the entrusted property can occur a long time after death of the settlor, whereas the property can be passed over even to persons not born during the settlor’s life,

legal heirs may wish to be omitted (e.g. descendants of the settlor are not interested in acquiring a business but minor grandchildren or relatives can have a capacity to lead the business on in the future).

EXAMPLE OF USE:

TRANSFER OF WEALTH AMONG GENERATIONS

TRUSTEE any individual

chosen by the client (family member, lawyer,

professional trustee)

EXAMPLE OF USE:

CONFIDENTIAL OWNERSHIP OF ASSETS

Goal

to protect a legally acquired property by keeping its ownership confidential

Risks to be solved

Exposure of the client against personal and business risks as an unwelcome consequence of the international fight against money laundering and terorism:

leak of data from the exchange of information between banks and

authorities, news leak, unauthorised entry into non-public registries, abuse of personal information available online

(e.g. specimen signatures in the corporate documents filed in public registries).

The individual trustee will be registered in the Commercial Registries and the Registries of controlling persons as the shareholder of the company and of the offshore company,

in the Czech Registry of Trusts, only the information on the trustee will be publicly available,

information on the third party is not presented to any authority.

EXAMPLE OF USE:

CONFIDENTIAL OWNERSHIP OF ASSETS

TRUST

Shares in

a UA company

Shares in foreign companies

third party settlor

initial fund

TRUSTEE any individual

chosen by the client (family member, lawyer,

professional trustee)

Czech trust

OUR SERVICES consulting and assistance with establishment of a trust,

– to define conditions of administration of the trust, – to identify the circle of beneficiaries, – to propose possible solutions of situations that may occur during the existence of the trust, – to define the scope of competencies of the trustee / beneficiaries / protector, – to define conditions for distribution of income or the assets held in the trust, – to consider tax aspects of the transfer of assets into the trust by the founder or by a third party, – to elaborate the trust documents, – to register the trust in the Register of Trusts and for tax purposes, – to open a bank account for the trust.

trustee services / protector services,

consulting advising during the existence / dissolution of a trust,

bookkeeping.

THANK YOU FOR YOUR ATTENTION!

Ing. Tomáš Chrobák Executive Manager

Tel.: +420 255 725 910 chrobak@protteco.com

PROTTECO TRUST COMPANY

Palac Archa, Na Porici 24-26, 110 00 Prague, Czech Republic

www.protteco.com