Czechs still go abroad to manage their assets. Some countries specialize in this activity and even conclude international agreements for this purpose.
Czechs still go abroad to manage their assets. Some countries specialize in this activity and even conclude international agreements for it. Trust funds are “celebrating” ten years since their introduction into the Czech legal system this year. Alongside the more traditional foundation funds, they are among the most popular asset management options. Even so, many Czech entrepreneurs seek this service abroad. Popular destinations include Liechtenstein, the United Arab Emirates, and Jersey. One reason for choosing them can be their historical track record.
“Clients often want to place their life’s work into an entity established in a country with a long tradition of asset management. They know that a hundred years of case law available in other countries offers greater stability than ten years of practice here,” explains Markéta Flanderková, partner at the law firm Portos and an expert on asset structures at CCS Premium Trust. According to her, however, the Czech trust fund solution also has its advantages. “Compared to foreign alternatives, it allows greater flexibility in arrangements,” adds the lawyer.
Is there strong interest among Czechs for foreign asset management?
Based on our experience, about 30 percent of clients inquire about this option. On average, these numbers have remained roughly stable. We definitely observed increased interest connected to the war in Ukraine. Demand rose significantly at the start of the conflict but has returned to average levels in recent months.
What other reasons might lead entrepreneurs to choose this?
It is usually related to activity abroad, whether business or personal. This means their business is focused on foreign markets, they own property abroad, or spend some time there. It can also be that their descendants live abroad and a suitable alternative is sought so they don’t necessarily have to travel to the Czech Republic. Another reason is that clients often look for stability and want to place their life’s work in an entity established in a country with a long tradition of asset management.
What practical reasons are there to seek this service abroad?
It is always advisable to choose a country whose main activity is asset management, because stability is extremely important — not only legal or tax stability but also stability in terms of foreign policy focus. Such countries often conclude international agreements suitable for asset management, for example treaties preventing double taxation. The point is that the policy of the chosen country guarantees the protection of the managed assets.
Do clients limit their choice to economically traditional countries, or do they also select others attractive for their legal frameworks?
In the Czech Republic and Europe, Liechtenstein remains the most preferred because clients look for certainty in asset management. People do not choose jurisdictions where these entities were just recently introduced, since it is unclear how they will function, the decision-making practice is unknown, and it’s unclear how the country will behave long-term, e.g., regarding taxation. In traditional jurisdictions, you can rely on relatively stable conditions.
Do you also notice interest in more exotic options? There is talk of growing popularity of trusts established in Jersey or foundations set up in the United Arab Emirates.
These two countries may seem somewhat exotic to Czech citizens, but for foreign clients they are quite common destinations. Jersey is chosen by clients oriented mainly toward the US and UK. Jersey follows the Anglo-American common law system and is linked to the British Crown, with a parliamentary system, and is a country specializing in asset management. Management in the UAE is mainly related to investments, especially real estate. It is interesting for clients focused on the Asian market. Many are athletes or other well-known media personalities. Other popular destinations include Luxembourg, Malta, Hong Kong, or Singapore, though these are less common among Czech clients.
Are there disadvantages or risks related to foreign asset management?
Tax issues definitely need to be addressed. Multiple jurisdictions can intervene, so it is absolutely crucial to first evaluate the client’s and beneficiaries’ tax situation. You cannot say beforehand which option is better. We always start with a tax analysis to recommend the optimal solution.
Generally speaking, for which clients is domestic management suitable and for which is foreign management better?
We consider the nature of the client’s business, where key companies are founded relative to their business. It’s also important in which countries the client owns property and their tax residency. The same is checked for descendants and other beneficiaries. We evaluate everything as a whole along with the client’s future plans.
How significant was the introduction of trust funds into Czech law by the new Civil Code?
At the start, it was a new institute in the Czech environment, but we had experience from foreign colleagues long before the new Civil Code was adopted. Clients who previously had no option to establish an asset management entity domestically were already seeking foreign alternatives. When trust funds were introduced, we already knew what to watch out for, what to set carefully, and what to warn clients about. This remains a major competitive advantage for us.
What are the experiences with trust funds after ten years of use?
Is their popularity growing? The numbers speak for themselves. We are slowly approaching six thousand trust funds, confirming that interest is still increasing. Expert discussions have taken place and continue. There are always questions that need clarification. Ten years is still relatively short, also because it takes time for dispute decisions to reach the highest courts. This is one reason clients choose foreign alternatives. They know a hundred years of decision practice available abroad offers greater stability than ten years of domestic practice.
Clients want stability. They want to place their life’s work into an entity established in a country with a long tradition of asset management. Ten years of Czech practice is a short period.
Would you highlight any advantage of the Czech framework, something that gives it a competitive edge?
The Czech fund solution allows greater flexibility of arrangement compared to foreign alternatives.
Are there calls for higher professionalism among trust managers?
This is one of the things we would like to change legislatively. It is related to allowing legal entities to be trust managers. Currently, only natural persons can be managers, which means if something happens, a new one must be found. If a legal entity could be manager, continuity of asset management would be better maintained, which is common abroad. This also relates to professionalism. Having a legal entity licensed to provide asset management services related to trusts or foundations would lead to greater trustworthiness, stability, and expertise.
Should licensing be mandatory for all managers?
In Liechtenstein, this is the case; the manager must always be a licensed trust. However, I would not want to close the door to smaller family trusts here. Those would not necessarily have to have professional management. The option of choice should remain. For example, a client might initially want a family lawyer or financial advisor to perform this function, and if they die or can no longer perform it for another reason, then a licensed professional manager or designated legal entity specializing in asset management would take over.
Should the Czech Republic consider further legislative changes to become more attractive for asset management?
A clearer definition of the beneficial owner would be useful. Under Czech law, the beneficial owner includes the founder, beneficiary, and manager — basically everyone involved in the trust — which does not correspond to the actual beneficial owner. This is one reason foreign alternatives are chosen, as abroad the definition is not as broad.
What is the significance of registering foreign trusts in the Czech registry maintained by the Ministry of Justice, where Czech trusts have been required to register since 2018?
There are not many registered foreign trusts, roughly up to one hundred. These are trusts established under foreign law. Because they are managed from the Czech Republic, or the majority of the managed assets are here, or their purpose is to be fulfilled here, it makes sense to register these trusts in the domestic trust registry. The motivation is mainly transparency. You can look up the registry, find the trust, and learn all facts the founder allowed to be published. Thanks to this, you don’t have to search for information in complicated foreign databases and registers.
Markéta Flanderková
Partner and asset management expert at Portos law firm and senior consultant at CCS Premium Trust. In her practice, she focuses mainly on asset structures, corporate and restructuring agendas, and criminal liability of legal entities. She also contributes to professional publications on asset management topics.
The article was published on the portal ekonom.cz (July 18, 2024)
