Contribution of an in-kind premium (e.g., marketing rights)

Strategic Corporate Financing: The Power of Non-Monetary Contributions Outside the Share Capital

The law distinguishes between two basic forms of contributions, the choice of which has a fundamental impact on a company's strategy:

• Voluntary contribution (Section 163 of the Business Corporations Act - ZOK): This is the most frequently used and most flexible option. It is based on a contractual agreement between the shareholder and the company, and the consent of the executive director is sufficient for its implementation. A major advantage is that it can be provided not only in cash but also in a non-monetary form, such as valuable marketing rights, software, know-how, or real estate.

• Mandatory contribution (Section 162 of the Business Corporations Act - ZOK): This instrument allows the General Meeting to impose an obligation on shareholders to provide a contribution. However, this option must be explicitly enshrined in the articles of association, which also sets the maximum aggregate amount of contributions. Importantly, a mandatory contribution can only be provided in monetary form. In practice, it is used less frequently, typically in the start-up phase, during restructuring, or as a defence against hostile actions by minority shareholders.

Contribution vs. Loan: Why the Form Matters

When deciding on company financing, it is crucial to distinguish between a contribution and a loan from a shareholder. While a loan is part of borrowed funds and thus increases the company's debt, which can complicate matters such as obtaining a bank loan or the tax deductibility of interest under the thin capitalisation test, a contribution becomes part of the company's equity. This step does not increase debt but, on the contrary, strengthens the company's financial indicators. The shareholder does not become a creditor, and the company has no obligation to return the contribution.

Contribution vs. Increase in Share Capital (SC): Speed and Simplicity Win

Compared to increasing the share capital, a voluntary contribution offers undeniable advantages in speed and efficiency. The process of increasing the share capital is administratively and financially demanding – it requires a decision by the General Meeting in the form of a notarial deed and subsequent registration in the Commercial Register, which entails time delays and considerable costs.

In contrast, a voluntary contribution is significantly faster and cheaper, as it does not require a notary or registration in the register. Another significant advantage is that providing a contribution does not change the size of the shares or the voting rights of individual shareholders, which simplifies internal relations within the company. This strategic flexibility is an often underestimated but key advantage. It allows the company to react to market opportunities in almost real time. 

While competitors may be tied up by slow bureaucracy, a company using a contribution can immediately raise capital for an acquisition, an investment in research and development, or to strengthen its position before applying for a loan. This "silent capitalisation," which is not publicly visible in the Commercial Register, fundamentally strengthens the company's balance sheet and represents a significant competitive advantage.

Our lawyers and tax advisors at ARROWS will help you analyse your financial and strategic situation and recommend whether a contribution, a loan, or a change in share capital is more suitable for you. We will prepare a tailor-made solution for you that maximises benefits and minimises risks.

The Contribution Process in Practice: How to Transfer Marketing Rights into Company Assets

The implementation of a non-monetary contribution is a process that requires careful preparation and adherence to legally prescribed steps. Although it may seem simple, each step has its legal and practical consequences.

Consent of the Executive Director – More Than Just a Formality

The basic condition for the validity of a voluntary contribution is the consent of the executive director or other statutory body of the company. Although the law does not require a specific form for this consent and it can be granted informally (so-called tacitly), for example, by the mere signing of the contribution agreement by the company represented by the executive director. 

To ensure maximum legal certainty and to avoid any doubts in the future, we strongly recommend granting consent in writing, ideally as part of the contribution agreement or in a separate document. However, this consent also carries a significant risk of personal liability. 

If an executive director agrees to accept a non-monetary contribution that is clearly overvalued or worthless to the company, he violates his duty to act with due managerial care. He may thus be personally liable for the damage caused to the company by the artificial inflation of its equity with a fictitious value. Consent is therefore not just a signature, but an active decision for which the executive director bears full responsibility.

Contribution Agreement – A Solid Foundation for the Transaction

Although the law generally does not require a written form for a contribution agreement (with the exception of specific cases, such as an agreement between a single-member company and its sole shareholder), concluding it in writing is absolutely crucial to prevent future disputes.

A well-prepared agreement should contain at least the following elements:

• Precise identification of the contracting parties (the shareholder as the provider and the company as the recipient).

• Detailed and unambiguous specification of the subject of the contribution (in our case, marketing rights – e.g., rights to a trademark, license rights, rights to an advertising campaign, their scope, duration, etc.).

• The value of the non-monetary contribution with a clear reference to the expert valuation report that determined this value.

• Explicit confirmation that the company's executive director agrees to the provision of the contribution.

Contribution and Accounting – Correct from the Very Beginning

The actual "contribution" of an intangible asset, such as rights, takes place at the moment the contribution agreement becomes effective and upon the handover of all relevant documentation that records these rights and allows the company to fully use them.

From an accounting perspective, this is not an income-generating operation. The company will account for the received contribution on the balance sheet, debiting the relevant asset account (e.g., 014 – Appreciable Rights) and crediting an equity account, specifically account 413 – Other Capital Funds. This step leads to a real strengthening of the company's balance sheet.

ARROWS will prepare the complete contractual documentation for you and manage the entire contribution process. We will prepare a legal opinion for the executive director that assesses the transaction's compliance with the law and protects them from the risk of personal liability.

Valuation of Intangible Assets: The Crucial Role of the Expert Valuation Report

For a non-monetary contribution, the correct valuation of the contributed asset is absolutely essential. It is not just a formal requirement, but a key element that ensures the transparency and legal security of the entire transaction.

Legal Necessity and Its Reason

The Business Corporations Act in Section 163(2) explicitly states that a non-monetary contribution must be valued by an expert. The law here refers to the analogous application of the provisions on non-monetary contributions (Section 143 of the Business Corporations Act). The reason is to protect the company, its creditors, and other shareholders. The expert valuation report is intended to ensure that a real, market-verifiable value is contributed to the company, thus preventing the fictitious inflation of capital with worthless assets.

Selection of the Expert and Report Requirements

Unlike the previous legal regulation, the expert is no longer appointed by a court. The choice is entirely in the hands of the company, or its founders or statutory body, who select the expert from the official list of experts.

The expert valuation report must meet the requirements set out in Section 251 of the Business Corporations Act and must contain at least:

1. A detailed description of the non-monetary contribution: In the case of marketing rights, it is necessary to precisely define what rights are involved, their content, scope, territorial validity, and duration.

2. The valuation methods used: The expert must state and justify which valuation methods were used (e.g., income, cost, comparable).

3. The resulting valuation amount: A clear statement of the value at which the non-monetary contribution is appraised.

The report should not be older than six months as of the date of the contribution, and the company is obliged to file it in the Collection of Deeds of the Commercial Register.

Specifics of Valuing Marketing Rights

The valuation of intangible assets, such as marketing rights, is a highly specialised discipline. Unlike tangible assets, it is not possible to rely on simple physical parameters. The expert must analyse the future economic benefits that these rights will bring to the company. 

Among the most commonly used methods is the Discounted Cash Flow (DCF) method, which estimates the future cash flows generated by the right, or comparable methods that analyse license fees paid for similar rights on the market.

A high-quality and well-reasoned expert valuation report is not just a formal document for the authorities. It functions as a key risk management tool and as an "insurance policy" against future disputes. For the executive director, it represents a defence against a potential accusation of breaching the duty of due managerial care.

For the company, it serves as a shield against the value being challenged by the tax office. And last but not least, it prevents disputes between shareholders about whether the contribution was "fair." The investment in a quality report and its subsequent legal review thus pays for itself many times over in the form of reduced risk.

We cooperate with a network of proven experts specialising in intangible assets. We will ensure that the expert valuation report is not only formally correct but also methodologically defensible, and we will conduct its legal review to protect you from future complications.

The Tax Maze of Non-Monetary Contributions: A Guide for the Contributor and the Company

A correct assessment of the tax implications is absolutely crucial for the success of the entire operation. A mistake in this area can lead to unexpected tax assessments and significant penalties. It is necessary to look at the transaction from the perspective of both parties involved – the company and the contributor.

The Company's Perspective (Recipient)

From the perspective of corporate income tax, the receipt of a non-monetary contribution is a tax-neutral operation for the company. It is not a taxable income that would affect the financial result and the tax base. As already mentioned, it is a purely balance sheet operation that is reflected only by an increase in equity in account 413 – Other Capital Funds.

The Contributor's Perspective (Shareholder)

For the shareholder, providing a contribution has a significant future tax consequence. The value of the provided contribution (determined by the expert valuation report) increases the tax acquisition cost of their share in the company. This principle is enshrined in Section 24(7) of the Income Tax Act (ITA). A higher acquisition cost is key because it serves as a tax-deductible expense that will reduce taxable income in the future, for example, upon the sale of the share or upon the payment of a settlement share or liquidation balance.

The VAT Trap – When Do You Have to Pay Tax?

Here lies one of the biggest and most frequently overlooked risks of the entire transaction. If the shareholder is a VAT payer and has claimed a VAT deduction on the acquisition or creation of the contributed asset (for example, when purchasing services from a marketing agency to create a brand that is now being contributed), the contribution itself is considered a taxable supply.

In such a case, the shareholder is obliged to pay VAT on the value of the contribution. The tax base is the price at which a similar asset could be acquired, or the total costs incurred in its creation. For the company receiving the contribution (if it is a VAT payer), this, on the other hand, means that it can claim a tax deduction from this supply.

The tax risks in this transaction are unevenly distributed. While for the company, the receipt of the contribution is neutral from an income tax perspective, for the contributor, an immediate and often unexpected obligation to pay VAT may arise.

Many entrepreneurs focus on the corporate and accounting aspects and completely overlook this "VAT trap," which can lead to a tax assessment and related penalties from the tax office, such as fines and late payment interest. It is this asymmetry of risks that shows why a comprehensive legal-tax review of the entire transaction is necessary, not just its individual parts.

Our tax specialists at ARROWS will conduct a thorough analysis of the VAT implications and ensure that all tax obligations are met correctly and on time. We will prepare an expert opinion for you that will protect you from the risk of tax assessment and penalties.

The International Dimension: Contribution from a Foreign Shareholder

In a globalised economy, it is common for shareholders in Czech companies to be foreign entities. Providing a non-monetary contribution from a foreign shareholder is entirely possible, but it brings with it another layer of complexity, especially in the tax area.

Specifics of the Transaction and Determination of the Acquisition Cost

The basic legal procedure for the contribution remains the same, governed by the Czech Business Corporations Act. The fundamental differences arise in the tax regime. If the contributor is a tax non-resident, the value of the non-monetary contribution for the purpose of determining the acquisition cost of their share in the Czech company is determined at the converted foreign price according to Section 24(7) of the ITA, using the exchange rate of the Czech National Bank valid on the date of the transfer of ownership.

Application of Double Taxation Treaties (DTTs)

International double taxation treaties play the most important role, especially at the time of the future return of the contribution. Income from the return of a contribution is normally subject to a 15% withholding tax in the Czech Republic. However, the relevant international treaty, which takes precedence over Czech law, may reduce this rate or even stipulate that the right to tax belongs exclusively to the state where the shareholder is a tax resident.

Obligations of the Czech Company

The Czech company that returns the contribution acts as the tax payer. It therefore has a legal obligation to correctly identify and apply the relevant double taxation treaty. In practice, this means that it must request a certificate of tax residency from the foreign shareholder in order to apply the reduced tax rate or exemption.

The involvement of a foreign entity multiplies the complexity of the entire operation. For the management of a Czech company, this is a minefield where it is necessary to navigate not only Czech legislation but also international treaties. A misapplication of a DTT can lead either to harming the foreign investor (a higher tax is withheld than necessary) or to penalties for the Czech company (it withheld a lower tax and must pay the difference from its own funds). It is in these situations that the value of our international network is fully demonstrated.

Thanks to our international network, ARROWS International, built over more than ten years, we handle transactions with an international element on a daily basis. We will ensure the correct application of double taxation treaties and the tax optimisation of your transaction, whether you are a Czech company with a foreign investor or a foreign investor entering the Czech market.

The Way Back: Conditions and Tax Implications of Returning a Contribution

Just like the contribution itself, the potential return of a contribution to a shareholder has its own strict rules and tax implications. It is a mistake to assume that this is a simple operation. On the contrary, it requires careful planning and adherence to legal conditions.

Legal Framework for Return – It's Not a Given

It is crucial to realise that a shareholder has no legal entitlement to the return of a contribution. The decision to return it is made exclusively by the company's General Meeting. This decision is also limited by two key conditions:

1. Loss coverage condition: A contribution can only be returned to the extent that it exceeds any accumulated loss of the company shown in the accounts. Contributions thus primarily serve as a financial cushion to cover losses.

2. Insolvency test (Section 40 of the Business Corporations Act): The company must not cause its own insolvency under the Insolvency Act by returning the contribution. The statutory body (executive directors) bears full responsibility for conducting this test and for ensuring that the payment does not jeopardise the company's financial stability.

Tax Obligation upon Return – Prepare for a 15% Withholding Tax

Since 2015, the return of a contribution outside the share capital has been considered taxable income on the part of the shareholder. The company paying out the contribution is obliged to withhold and pay a 15% withholding tax from the paid amount in accordance with Section 36(2)(e) of the ITA.

Tax Optimisation: How to Reduce the Tax Base?

The tax base for calculating the withholding tax can be legally reduced. The shareholder has the right to offset the acquisition cost of their share (or a proportional part of it) against this income. The key condition is that the shareholder must credibly prove this acquisition cost to the company (as the tax payer), for example, by presenting contracts and accounting documents. This is where the importance of careful documentation at the time of the contribution becomes apparent.

Differences in Taxation: Original vs. New Shareholder

The tax regime differs depending on who the contribution is returned to:

• Original contributor: If the contribution is returned to the shareholder who originally made it, it primarily reduces their acquisition cost of the share. Taxation occurs only if the returned amount exceeds this acquisition cost.

• New shareholder: The situation is more complicated if the share has been sold in the meantime and the contribution is returned to a new shareholder. This new shareholder is fully taxed with a 15% withholding tax, but can claim the purchase price for which they bought the share as an expense.

The contribution and return of a contribution cannot be viewed as two separate transactions. They form a single, complete investment cycle. Decisions made at the beginning, especially the method of valuation and its careful documentation, have a direct and fundamental impact on the tax consequences at the end of this cycle. Correct documentation and valuation at the time of contribution are absolutely essential for tax optimisation several years later. This requires strategic planning of the entire process in advance, including a strategy for a potential "exit" (return).

Our lawyers will not only guide you through the contribution process but will also prepare a strategy for its future effective and tax-optimised return. We will represent you at the General Meeting and prepare all the necessary documents to help you avoid unnecessary taxes and legal risks.

Turn Your Assets into Capital with the Certainty and Support of ARROWS

A non-monetary contribution is a powerful tool for modern and flexible management of corporate finances. It allows for a quick strengthening of equity and the utilisation of the value of intangible assets, such as marketing rights, that would otherwise lie dormant. However, as we have shown in this detailed manual, the path from contribution to potential return is fraught with legal, valuation, and tax pitfalls, the underestimation of which can lead to serious financial and legal consequences.

The key to a safe and effective implementation is to stop viewing this operation as a simple administrative act and to approach it as a strategic project that requires comprehensive expert guidance from the very beginning. The correct setup of contracts, a methodologically sound expert valuation report, and the proactive resolution of tax implications are the pillars on which the success of the entire transaction rests.

At ARROWS, we specialise in these transactions. Our experience from long-term care for more than 150 joint-stock companies, 250 limited liability companies, and 51 municipalities and regions gives us a unique insight into the needs of our clients. We pride ourselves on speed, precision, and the high quality of our legal and tax services. 

We are not just lawyers – we are your business partners. We are happy to listen to your business ideas and connect you with other clients if we see interesting synergies. Contact us and turn the value of your assets into real capital – safely and with certainty.