The article was published in Äripäev on 15 July 2026.
When a new legal structure for holding family wealth is introduced, the legislator must address the related tax issues at the same time, writes Tõnu Kolts, Managing Associate and an expert in tax advisory and private wealth.
Estonia has long lacked a legal form suitable for the long-term holding, protection and intergenerational planning of family wealth. In practice, private limited companies, foreign foundations, trusts and other wealth management structures have been used for this purpose. An Estonian private limited company is familiar and effective from a tax perspective, but when it comes to family wealth planning, one of its main drawbacks is often the lack of privacy. For example, annual reports, shareholders and the size of their shareholdings are publicly available. Foreign structures may offer greater flexibility and privacy, but they also involve additional costs, administrative burden and, often, uncertainty as to their tax treatment in Estonia.
The introduction of a private foundation regime is therefore a very welcome development. The proposed private foundation would make it possible to establish, under Estonian law, a structure intended to hold, manage and grow primarily family wealth for the benefit of beneficiaries specified in its articles of association. Such a solution could help keep family wealth within the Estonian legal environment, reduce the need to use complex foreign structures and provide families with a clearer instrument for long-term wealth planning.
However, creating a new civil-law structure alone is not enough. If the private foundation is to offer a genuine and usable alternative to a private limited company, a foreign trust or a family foundation, its tax treatment must be as clear as its civil-law framework. Without well-considered tax rules, the private foundation may remain an incomplete solution: the legal form would exist, but its practical use would remain limited because of tax uncertainty, the risk of double taxation and other tax-related concerns.
The draft legislation is currently still at Government level and has not yet reached the Riigikogu. This is therefore the right time to draw attention to the fact that the private foundation regime should be accompanied by amendments to the Income Tax Act and, where necessary, other tax legislation. The rules that currently apply to ordinary foundations are not sufficient in light of the intended purpose of a private foundation and may create exactly the kind of uncertainty that the new regime is meant to reduce.
Tax questions require specific answers
The most important questions concern payments made by a private foundation to beneficiaries and the use of foundation assets for personal or family purposes. The transfer of assets to the private foundation and the distribution of assets upon its liquidation also need to be addressed.
The key issue is how payments to beneficiaries should be taxed and whether a private foundation should be entitled to benefit from the tax exemptions and reliefs available to companies. It can be assumed that a payment made to an individual would be subject to income tax, but the law should specify whether taxation takes place at the level of the private foundation, similarly to Estonian companies, or at the level of the beneficiary. It must also be clear what category of income the payment constitutes and what exemptions or mechanisms for taking previously taxed income into account may be used.
The question of asset use is equally practical. If a private foundation owns, for example, a family farm, a summer home, real estate, an art collection or other assets of significance to the family, the law must clearly determine how the use of those assets by beneficiaries should be taxed. In other words, if the assets of the private foundation are used as though they were personal assets, the tax rules must specify whether and when a taxable benefit arises.
One possible theoretical solution would be to treat the private foundation as tax-transparent. In that case, the foundation itself would effectively be disregarded for tax purposes and taxation would take place at the level of the beneficiaries or the founder. In some cases, this could help explain why a family uses foundation assets as though they were its own. At the same time, tax transparency may not be an appropriate solution. It could raise the question of whether beneficiaries should also be taxed on unrealised income or income that has not been distributed to them. In many cases, such an outcome would be unfair and impractical, particularly where beneficiaries do not control the foundation’s assets and do not receive information about its ongoing income. A private foundation would therefore benefit more from a separate and precise tax regime than from simply extending existing transparency rules.
A private foundation should not be placed at a tax disadvantage compared with a private limited company
A private foundation is primarily intended for the holding and management of passive assets. Such assets may include shareholdings in companies, securities, investment funds, real estate, loans or other investment assets. These may generate dividends, interest, rental income or capital gains.
If the same assets were held through a private limited company, the income tax rules applicable to resident companies would generally apply. For example, subject to certain conditions, it may be possible to redistribute dividends tax-free or take into account income tax withheld abroad. This is an important part of Estonia’s corporate income tax system and helps prevent the same income from being taxed repeatedly.
However, neither a private foundation nor an ordinary foundation is a company within the meaning of the Commercial Code. A number of important provisions of the Income Tax Act specifically require the entity concerned to qualify as a resident company. If a private foundation is not treated, at least to some extent, in the same way as a resident company for tax purposes, it may end up in a significantly less favourable tax position than an ordinary private limited company used to hold and manage family wealth.
That would run counter to the purpose of creating the private foundation. If the state introduces a new legal form for holding family wealth, but the tax rules continue to steer people towards using a private limited company or a foreign structure, the underlying objective has not really been achieved. Consideration should therefore be given to amending the Income Tax Act so that, for matters such as the redistribution of dividends, the crediting of income tax withheld abroad and similar issues, a private foundation is treated comparably to a resident company.
The Polish example: the legal form and the tax rules must be developed together
Poland introduced its family foundation regime in 2023 and did not limit itself to creating a new civil-law structure. Tax rules were introduced alongside the family foundation legislation, covering contributions, foundation income, payments to beneficiaries, the use of assets, hidden benefits and the liquidation of the foundation. This gives users of the foundation certainty as to the tax consequences of the structure throughout its entire life cycle.
Estonia should follow precisely this approach. If a new legal form is created for holding family wealth, the legislator must address the related tax questions at the same time. Otherwise, the uncertainty currently associated with foreign structures will simply be replaced by uncertainty surrounding a domestic private foundation.
A private foundation is needed, but it also needs a tax framework
The introduction of a private foundation is, in principle, the right step. Estonia needs a local, understandable and reasonably priced structure that enables family wealth to be held and managed over the long term. This would reduce reliance on foreign trusts and foundations and bring more wealth management activity into the Estonian legal environment.
However, the success of the private foundation will depend on whether the tax rules support its intended purpose. If these questions remain unresolved, the private foundation may remain a good idea whose practical use is limited. The creation of the civil-law framework for a private foundation should therefore be accompanied by a separate and well-considered tax regime. Only then can the private foundation become a genuine alternative to existing solutions and a legally certain tool for Estonian families planning their wealth.
