As we have noted in previous articles, family businesses play a key role in Slovakia’s economic structure, accounting for a significant number of business entities in the country. In today’s dynamic business environment, many family businesses are seeking effective ways to manage and protect their assets, particularly in cases of intergenerational succession. One such solution is the creation of holding structures. Holdings enable centralized management, tax optimization, and the protection of family assets; however, there are certain legal and practical limitations that may affect their suitability or adequacy. In the following article, we will therefore focus on the advantages of holding companies and their limitations, while also highlighting the options offered by Czech law in the form of trust and endowment funds.
Holding Structures, Their Purpose, and Benefits Under the Legal System of the Slovak Republic
When establishing a holding structure, it is necessary to proceed on a case-by-case basis, as the overall structure, legal framework, and the transformation process itself always depend on the specific nature of the business, the number of family members, and the assets the family possesses, as well as the clients’ wishes and the extent to which individual family members wish to participate in the family business.
A holding structure essentially represents a structure where the “parent company” manages and controls “subsidiaries,” while within this structure there is a certain degree of separation, such that, in the event of an adverse situation affecting one “subsidiary,” the other “subsidiaries” or the “parent company” itself—through which family members control the entire holding—are not jeopardized. Above the “parent company,” there may be additional private holding companies and funds belonging to individual business partners and their families.
The primary purpose of the holding structure is the consolidation of assets, particularly to protect them from negative external influences, such as exhausting administrative proceedings by government agencies or disputes with business partners. In addition to risks from the external environment, the consolidation of family assets through the creation of a holding structure also provides protection against risks arising from the intra-company or internal family environment, such as the settlement of joint marital property or the death of a family member. This can trigger a lengthy and undesirable process that will ultimately lead to the so-called “fragmentation” of family assets and the involvement of additional people—who may not even be family members—in the family business.
Another key advantage of a holding structure is the establishment of property relationships among individual family members, which will correspond to subsequent remuneration or dividend payments; in this context, it is important to note that that by establishing a holding structure alongside a family constitution and a family council, personal relationships among individual family members can also be defined, thereby preventing disputes regarding the employment of family members, the making of significant decisions within the family business, and the setting of future goals.
Within a holding structure, funds generated by all subsidiaries can be effectively pooled and subsequently reinvested across the entire structure, which offers a significant advantage, especially in the area of legal tax optimization, which we will, however, address in a separate article together with our partners. The holding company, or “parent company,” can thus redistribute profits among subsidiaries according to their needs—whether for development, covering operating costs, or other strategic investments—which increases the efficiency of capital management within the holding structure.
The holding structure also brings several other advantages, including in relation to the external environment or third parties, as the holding structure provides not only a certain degree of anonymity but also attracts additional investors and enhances the credibility of its contractual partners.
Limitations of Slovak legislation and opportunities offered by the jurisdiction of the Czech Republic
One of the main shortcomings or limitations of Slovak legislation is the absence of specific types of legal entities or entities with their own legal personality that would be specifically designed for family businesses for the purpose of creating a holding structure. Currently, family businesses can operate only within existing legal forms, such as limited liability companies (s. r. o.) or joint-stock companies (a. s.), and these legal forms are also among the most commonly used. These traditional types of business entities do not always reflect the unique needs and characteristics of family businesses, nor the requirements of family business founders, such as:
Flexibility of Current Legal Structures: Each of the existing statutory legal forms of legal entities has certain advantages as well as disadvantages, and the advantages of these individual legal forms cannot be combined according to the requirements of family business founders and individual family members or the family business itself.
Legal protection of family assets: Many founders of family businesses seek ways to protect their assets and ensure their transfer to future generations, particularly by securing a regular income from the family business for future generations. However, as noted above, current legal structures do not always adequately reflect the needs of founders and members of family businesses, nor do they always provide sufficient protection against the risks—whether external or internal—that family businesses face throughout their existence.
Given certain limitations of Slovak legislation regarding the establishment and management of family holding companies, many founders of family businesses are turning to the options offered by the Czech Republic, particularly in the area of trust funds. The Slovak Republic does not offer such an option, which significantly limits the flexibility of family businesses in protecting and managing their assets. Trust funds, which operate as a separate legal entity in the Czech Republic, thus represent another option for managing family assets and offer more flexible options for the long-term management of family assets, most often serving as an extension within family holding companies. Within trust funds, there is a specific and separate allocation of family assets, which are set aside based on a predefined purpose and for a specified period, and such separately set-aside assets are not subject to probate proceedings nor can they be used to satisfy creditors’ claims arising from the family business’s operations. The main purpose of a trust fund, or trust administration, is thus to keep family assets together for future generations and prevent their fragmentation.
Another option for asset management is endowment funds, which are also available under Czech law; however, it is not yet possible to establish them in Slovakia. Like trust funds, endowment funds offer additional options for the effective and flexible management of family assets; in both trust funds and endowment funds, a certain amount of assets is set aside for a specific, predefined purpose, through which the needs of current as well as future family members can subsequently be supported and met.
However, there are certain differences when comparing trust funds and endowment funds. Endowment funds are more flexible than trust funds, which brings certain advantages, such as the ability to amend the founding documents created at the time of establishment, as well as the ability to manage foreign bank accounts, which naturally brings certain benefits. Certain differences can also be observed in terms of taxation, particularly regarding the payment of dividends from Slovak companies, as in some cases business income in the form of dividends can be transferred to a foundation fund with virtually zero taxation. Among other things, unlike a trust fund, a foundation fund is a legal entity with separate legal personality, and thus can ultimately be established for an indefinite period, which is not possible with a trust fund. On the other hand, however, endowment funds do not offer the same degree of anonymity as trust funds, which, moreover, are not required to have a registered office.
Based on the facts outlined above, it follows that the jurisdictions of the Slovak and Czech Republics offer several options for ensuring the protection and management of family assets for future generations, while the legal system of the Czech Republic, in addition to trust and endowment funds, also offers certain distinctions within common corporate forms, which may in turn present certain options for some founders of family businesses and family members to meet their specific requirements.
When seeking the optimal solution, however, one should not overlook other options offered by the legal systems of countries beyond the borders of the Czech Republic and Slovakia, both within the European Union and potentially in third countries. Based on our experience, several clients have opted for the jurisdictions of other countries, such as Luxembourg or Malta, whose legal systems best suited the specific requirements of the client in question, taking into account both the evolving situation in Slovakia and the future operation of the family business. Our law firm, Hronček & Partners, s. r. o. operates within the international organization Ally Law, which brings together leading law firms from nearly every corner of the world. As a result, we are able to meet our clients’ needs in collaboration with our partners in a way that ensures these needs are realized to the greatest extent possible.
