Executive Pay vs. Salary

Why the Topic of Executive Remuneration and Salary is Crucial for s.r.o. Owners

In Czech small and medium-sized companies, the roles of executive director and shareholder often merge into one person, which carries specific risks. Although the statutory body makes independent decisions about business management, it also bears full personal responsibility for any breach of the duty of due managerial care, including potential liability for the company's debts with their personal assets.

Autonomous remuneration arrangements without a deep understanding of the context often lead to serious errors. A typical example is the absence of a valid executive service agreement or fictitious invoicing by the executive as a self-employed person (OSVČ). During an inspection, the tax authority will uncompromisingly reclassify such conduct as dependent activity and assess additional contributions and penalties against the company.

The choice between executive remuneration, a traditional salary, and a share of profits requires a precise tax calculation. To set up executive remuneration in accordance with the Act on Business Corporations (ZOK) and with regard to the statutory body's liability, it can be useful to draw on practices from the field of corporate law, holdings, and structures. Properly agreed remuneration is a tax-deductible expense for the s.r.o., whereas a share of profits, although paid from the corporation's after-tax profit, may be more advantageous for the shareholder due to its exemption from social security and health insurance contributions.

Furthermore, this optimisation framework is constantly influenced by dynamic legislation, especially changes in personal income tax and shifts in the average wage limits. Lawyers from the ARROWS law firm therefore regularly readjust older executive service agreements, thereby reflecting the current legal status and the planned abolition of withholding tax on the remuneration of members of corporate bodies from 2027.

Insolvency Risks: When an Executive Must Retroactively Return Remuneration

A specific risk for an executive is that in the event of the company's insolvency, the insolvency court may decide to order the surrender of benefits obtained from the executive service agreement for up to two years retroactively. This applies if the executive, in breach of the duty of due managerial care, failed to take steps to avert the insolvency.

It is therefore crucial that the contractual arrangement is not only tax-optimised but also legally robust and defensible before an insolvency administrator. A formally defective or unreasonably high remuneration can turn against the executive in a crisis situation.

In practice, the question of when the relationship with an executive is assessed as a dependent activity and what impact this has on contributions and additional tax assessments is also frequently addressed, as discussed in our new article Invoicing Between a Shareholder and Their Own Company: Legal and Tax Risks That Can Threaten a Business.

From a business owner's perspective, it is key to view executive remuneration, salary, and profit shares as an interconnected whole. Each of these tools has its advantages and disadvantages, and only their correct combination brings a stable and predictable result.

Lawyers from the ARROWS law firm therefore commonly address executive remuneration in the context of the overall structure of holdings, planned transactions, financing, and the personal situation of the owners.

The tax implications of the individual options (remuneration, salary, dividend) should also be assessed within the framework of tax law, especially due to the risk of additional assessments and penalties for incorrect income classification.

Legal Framework: Executive Director vs. Employee

The basic legal regulation of an executive director of a limited liability company (s.r.o.) is based on the Act on Business Corporations (ZOK), which stipulates that the statutory body of an s.r.o. is one or more executive directors. The executive is responsible for the company's business management, represents it externally, ensures proper accounting, and must generally perform their duties with due managerial care.

The relationship between the company and the executive is typically governed by a written executive service agreement, which must be approved by the General Meeting. Without this approval, the agreement does not become effective, and the performance of the duties is considered unpaid.

The content of the executive service agreement is partly strictly determined by law. The ZOK states that the agreement must contain, in particular, a definition of the executive's rights and obligations, the manner of performance of duties, and, above all, an agreement on remuneration. Regarding remuneration, the law requires the agreement to explicitly specify all components of the remuneration, including any non-monetary benefits.

If the executive service agreement does not contain a provision on remuneration, the legal fiction is that the performance of the duties is unpaid. The same applies if the agreement is not concluded or approved by the General Meeting at all, retroactively from the date the function was established.

There are exceptional situations where an executive is entitled to at least customary remuneration if the non-approval was due to reasons on the company's side. In practice, however, these are exceptional and evidentially complex scenarios; relying on them preventively is unacceptable from a corporate risk management perspective.

If you are considering setting up regular payments outside of the standard annual dividend, the context described in the article Advances on Profit Share Payouts: Tax and Accounting Implications of Draining Company Cash on an Ongoing Basis may also be useful.

In practice, lawyers from the ARROWS law firm often encounter situations where a company has a written agreement with its executive, but formal approval by the General Meeting is missing. This is an opportunity for the tax office or an insolvency administrator to challenge the tax deductibility of the costs.

The Role of an Executive is Not Dependent Work

It must be emphasised that the mere performance of the duties of an executive director is not dependent work within the meaning of the Labour Code. Dependent work is an activity performed in an employment relationship in a relationship of superiority and subordination. However, an executive director carries out the business management of the company as a statutory body and is not in the position of a subordinate employee.

More recent case law allows the executive service agreement to be voluntarily subordinated to the Labour Code regime, but with the exception of liability. It is not possible to extend protections to the executive that would negate the essence of corporate law, such as the limitation of liability for damages.

In professional practice, a distinction is made between so-called false and true concurrence of roles. False concurrence occurs when an executive performs another, specific type of work for the company under an employment contract, which is not part of their duties as an executive. In such a case, both contracts are valid.

True concurrence, where the employment contract de facto covers business management, is invalid and exposes both the company and the executive to considerable risk. A statutory body cannot perform business management in an employment relationship. Lawyers from the ARROWS law firm always analyse the specific job description in detail for clients and propose a secure contract structure.

Employee Salary and Employment Relationship

An employee's salary is strictly based on an employment relationship governed by the Labour Code. An employee performs dependent work according to the employer's instructions, under their responsibility, in person, and for a salary. The employee enjoys broad legal protection, such as the right to holiday, severance pay, or protection against dismissal.

From a tax perspective, both a salary and an executive's remuneration are considered income from dependent activities and are subject to the same taxation. The difference lies in the legal nature of the relationship, the issue of personal liability, and the options for terminating the relationship.

In practice, consideration is often given to how to optimally combine an employment relationship for professional activities with the role of an executive. This model can make economic sense, but legally it is necessary to strictly distinguish which activities fall under which contract. A poorly set up concurrence leads to risks during inspections by authorities.

Tax Implications: Executive Remuneration, Salary, and Profit Shares

The Income Tax Act explicitly classifies the remuneration of s.r.o. executives as income from dependent activities, thereby putting it on par with traditional salaries. The company is therefore obliged to pay tax advances on these amounts and to fulfil all the statutory notification duties of an employer.

The personal income tax rate for 2026 is two-tiered. The threshold for the higher 23% rate is an annual tax base of CZK 1,762,812, which corresponds to a monthly amount of CZK 146,901. Income below this limit is subject to the basic 15% rate.

The tax base is purely the gross remuneration of the executive. Social security and health insurance contributions paid by the employer are no longer added to the tax base. The final tax advance is calculated from this gross amount after applying tax credits.

A specific regime applies to remuneration up to CZK 4,500 per month if the executive has not signed a tax declaration. For tax residents, a 15% withholding tax is still applied, while for non-residents, there was a complete transition to an advance payment regime in 2026 in connection with legislative changes.

Paying symbolic remuneration below the insurance limit is fully legal, and the tax office cannot dispute the unpaid nature of the executive's duties. However, a tax risk arises if the low remuneration is compensated by fictitious invoicing as a self-employed person (OSVČ), which the tax administrator will uncompromisingly reclassify as a Švarc system arrangement.

Setting up a suitable combination of remuneration and salaries that maximises net income and at the same time safely withstands an inspection is a key specialisation of the experts at the ARROWS law firm. We will be happy to help you optimise your model.

Executive Remuneration – Non-resident and Withholding Tax

A special regime applies to executives who are tax non-residents of the Czech Republic. For them, income for performing duties in a Czech company is considered income from a source within the territory of the Czech Republic. This income is normally subject to a 15% withholding tax, unless an international treaty provides otherwise.

From a practical point of view, it is critical to correctly determine the executive's tax domicile to avoid additional tax assessments and interest. Incorrect classification and withholding the wrong tax for a person who is in fact a Czech tax resident leads to an additional tax assessment, penalties, and default interest.

Thanks to its international network ARROWS International, the ARROWS law firm regularly deals with these cross-border concurrences and minimises the risk of double taxation.

Employee Salary – A Tax Perspective

From the perspective of the Income Tax Act, an employee's salary is taxed identically to an executive's remuneration – it falls under income from dependent activities. The tax rates of 15% and 23%, the application of tax credits, the tax relief for children, and the non-taxable parts of the tax base are completely identical.

If an executive performs a demonstrably different professional activity for the company, a division of income into salary and remuneration may be justified. When making a decision, it is necessary to assess in particular the impact of contributions and to take into account all employment law obligations.

Profit Share (Dividend) as an Alternative to Remuneration

A share of profits represents a completely different category of income than executive remuneration or salary. While salary and executive remuneration are tax-deductible expenses for the company, a share of profits is paid out of profit that has already been taxed at the corporate tax rate, which is 21% for 2026.

The advantage of a profit share is that it is not subject to social security or health insurance contributions, which makes it more advantageous in terms of contributions. When paid to a shareholder who is a natural person, this income is subject to a 15% withholding tax.

However, the payment of a profit share is strictly regulated by the Act on Business Corporations. Profit can only be distributed on the basis of approved financial statements and a decision of the General Meeting. The balance sheet test under Section 40 of the ZOK, which protects the company's equity, must be met.

If executives were to approve a profit distribution in violation of the balance sheet tests, they would breach their duty of due managerial care and would be personally liable for the return of the funds. A key limit is also the so-called insolvency test, which prohibits a payout if it would cause the company to become insolvent.

The ARROWS law firm recommends that all s.r.o. owners consistently perform and document the balance sheet and insolvency tests before each profit share payout.

Social and Health Insurance: When to Pay (or Not) and How Much

For the purposes of social and health insurance, an s.r.o. executive who receives remuneration for their duties is considered an employee. The company acts as an employer and is obliged to register the executive with the relevant district social security administration and health insurance company.

For 2026, the decisive income for employment of a small scale is set at CZK 4,500 per month, and social insurance is not paid on amounts up to this limit. If the remuneration reaches or exceeds CZK 4,500, standard participation in the insurance scheme arises, and contributions are paid on the entire amount.

The social security contribution rate for an executive is 7.1% of the assessment base, while the company as the employer pays a further 24.8%. For 2026, the maximum annual assessment base for social insurance is set at CZK 2,350,416; contributions are no longer paid on income above this limit.

If an executive's remuneration exceeds the CZK 4,500 limit, it is subject to health insurance without any further maximum cap on contributions. The total rate is 13.5% of the assessment base, with 4.5% being deducted from the executive and 9% paid by the company.

A key obligation for health insurance is to adhere to the minimum assessment base, which is the minimum wage. For 2026, the minimum wage is set at CZK 22,400 per month, which corresponds to a minimum monthly contribution of CZK 3,024.

Lawyers and payroll specialists from the ARROWS law firm routinely check these connections when reviewing remuneration to prevent additional assessments. If the remuneration is lower than the minimum wage, the company is obliged to calculate and pay the health insurance on the difference.

Employee Salary and Insurance Contributions

For an employee's salary in an employment relationship, standard contribution obligations for social and health insurance apply. For agreements to perform work (DPČ), the limit for social insurance contributions is the same as the decisive income for employment of a small scale, i.e., CZK 4,500 per month.

For agreements to complete a job (DPP) under the notified agreement regime, the decisive limit for insurance contributions in 2026 is CZK 12,000 per month. If income from a DPP with one employer under this regime does not exceed CZK 12,000, no contributions are paid.

For an owner-executive who is considering a concurrent employment relationship in their own company, it is crucial to ensure that the agreed salary corresponds to the professional work actually performed and that its amount is not challenged by the tax office as not being tax-effective.

Specific Situations: Self-Employed Persons (OSVČ), Concurrent Roles, and Non-residents

If an executive is also self-employed as an OSVČ, a concurrence of activities occurs. If the performance of the executive's duties with accounted remuneration of at least the minimum wage is the main employment, the self-employment is considered a secondary activity, which brings relief on advance payments.

If the executive's remuneration does not reach the minimum wage and the executive has no other main employment, their self-employment becomes their primary activity with the obligation to pay high minimum advance payments. These minimum monthly advance payments for 2026 have increased significantly.

For executives who are non-residents from EU member states, the applicable insurance legislation is determined according to European coordination regulations. If a foreign executive performs activities in more than one state simultaneously, it is necessary to apply for a determination of the applicable legislation and the issuance of an A1 form.

How to Practically Set Up Remuneration for an Owner-Executive of an s.r.o.

When choosing the optimal remuneration model for an owner-executive of an s.r.o., the following basic approaches are used in practice:

• Pure remuneration model for performance of duties: The executive has an executive service agreement with a fixed monthly remuneration. This is tax-deductible for the company but is subject to full taxation and contributions.

• Combined model (remuneration + profit share): The executive agrees on a reasonable remuneration for the performance of their duties, from which contributions are paid. The rest of the money is paid out as a profit share with a 15% withholding tax and no insurance contributions.

• Concurrent remuneration and salary model: The executive receives remuneration for their duties and at the same time a salary under an employment contract for a different type of work. This allows for the use of benefits but carries the risk of invalidity if the roles are not properly separated.

• Minimalist contribution model: The executive has a symbolic remuneration of up to CZK 4,500, from which they do not pay social insurance, and lives off profit shares. This model minimises contributions but brings the risk of losing sickness insurance coverage.

Single-Member s.r.o.: Executive = Shareholder

In single-member s.r.o. companies, where the sole shareholder is also the sole executive, specific rules apply to the executive service agreement. According to Section 13 of the ZOK, the agreement must be in writing and the signatures on it must be officially certified, unless it is a matter of ordinary business dealings.

Failure to comply with the written form or the absence of official certification of signatures leads to the ineffectiveness of the agreement, which can have fatal consequences during a tax audit. The sole shareholder, acting as the General Meeting, approves the agreement by their written decision, where the remuneration must be specified with complete clarity.

If the sole shareholder decides to finance their needs exclusively from profit shares, they must bear in mind that profit can only be distributed once a year after the approval of the regular financial statements. Ongoing cash withdrawals without fulfilling the legal processes are unlawful, and the tax office will reclassify them as standard income from dependent activities.

One-Off Extraordinary Bonuses and Tantièmes

In addition to regular monthly remuneration, an executive can also be granted one-off extraordinary bonuses or tantièmes, which are shares of the company's profit designated for members of its bodies. Any benefit that does not arise from the agreement can only be provided with the consent of the General Meeting.

If an extraordinary bonus were not approved by the General Meeting, it would be an unauthorised benefit, which the executive is obliged to return to the company. The law allows for the approval of an extraordinary bonus even beyond the scope of the agreement, but the decision must not jeopardise the company's financial stability.

Tantièmes can only be paid if the articles of association explicitly permit it and the General Meeting decides on it. From a tax perspective, a tantième is considered income from dependent activities, which means it is subject to standard taxation and social and health insurance contributions.

Procedural and Contractual Setup: What Not to Forget

The executive service agreement is the fundamental element of legal certainty between the company and the executive. For its 100% legal flawlessness, it is necessary to follow clearly defined procedural steps to prevent future disputes with the authorities.

The basis is a written agreement and its approval by the General Meeting before remuneration payments begin. According to Section 60 of the ZOK, the agreement must clearly define all benefits to which the executive is entitled, including non-monetary benefits such as a company car, phone, or laptop.

If any benefit is not specified in the agreement or subsequently approved by the General Meeting, it must not be paid to the executive. Non-approval results in the performance of duties being unpaid, with any remuneration paid being considered unjust enrichment.

Lawyers from the ARROWS law firm recommend regularly reviewing executive service agreements to reflect current court case law and changes in tax regulations. Regular reviews prevent the increasingly strict view of tax authorities on the provision of non-monetary benefits.

Articles of Association and Regulation of Profit Shares and Tantièmes

The articles of association are the fundamental constitutional document of the company, defining the boundaries for the decisions of the General Meeting and the activities of the executives. If executives are to be paid a share of the profit, this possibility must be explicitly enshrined in the articles of association.

The collaborating notaries of the ARROWS law firm ensure these corporate changes are made quickly and in full compliance with the law. For any change in the remuneration model that requires an amendment to the articles of association, the decision of the General Meeting must be certified by a notarial deed.

Internal Policies, Documentation, and Control Practices

To defend the tax deductibility of an executive's remuneration and benefits before the tax office, the existence of verifiable documentation is key. The company should have written minutes of General Meeting proceedings that prove the approval of agreements and bonuses.

Furthermore, internal policies for providing benefits are essential, clearly defining the rules for using company vehicles for private purposes. If an executive has a concurrent employment relationship, it is necessary to keep detailed records of working hours for this professional activity.

During tax audits, tax authorities focus on both the formal and substantive aspects of the relationships between the company and its owners. The absence of written agreements, missing minutes from General Meetings, or unclear cash flows are the most common reasons for additional tax and insurance assessments.

Final Summary

The difference between an executive's remuneration and an employee's salary is not merely terminological. They are two different legal regimes that carry a completely different degree of personal liability, different approval processes, and specific contribution rules. While from an income tax perspective both forms fall under income from dependent activities, there are fundamental differences in the area of insurance.

For an owner-executive of an s.r.o., it is crucial not to assess remuneration in isolation, but as a comprehensive system including remuneration for the performance of duties, a salary for a different activity, and profit distribution. Furthermore, this decision-making is influenced by constant legislative changes to insurance limits and the planned abolition of withholding tax on dependent activity income from 2027.

The greatest legal and financial risks arise where the formal side of things is underestimated: the non-existence of an executive service agreement, the absence of approval by the General Meeting, a disguised true concurrence of roles, or a breach of the strict balance sheet and insolvency tests when paying out profit shares.

The ARROWS law firm has a team of experienced corporate lawyers and tax specialists who will help you set up a stable and most tax-advantageous remuneration system. For the maximum security of our clients, we are insured for professional liability with a limit of CZK 350,000,000. Contact us, and we will be happy to prepare a tailored optimal solution for you.