How to protect a holding company during an inspection
You can defend a holding structure with documented economic reasons, not by its mere existence — under Section 8(4) of the Czech Tax Code, the Financial Administration examines whether the predominant purpose of the transactions was not to obtain a tax advantage. In 2024, the Supreme Administrative Court confirmed that the mere establishment of a holding company is not an abuse of rights; those who can only explain their reasons in general terms tend to lose their cases. Below, you will find what the courts have and have not accepted, and what documentation you should have ready before you receive an inquiry. The lawyers at ARROWS both establish and defend holding structures.
Key takeaways
What the Financial Administration Actually Examines During a Holding Company Audit
The basis is Section 8(4) of Act No. 280/2009 Coll., the Tax Code: in tax administration, no account shall be taken of a legal act whose predominant purpose is to obtain a tax advantage contrary to the meaning and purpose of a tax regulation. Case law has developed a so-called two-stage test from this.
The objective component is met if the taxpayer has fulfilled all the formal conditions of the statutory provision but has acted contrary to its purpose. For the exemption of profit shares paid by a subsidiary to a parent company under Section 19(1)(ze)(1) of the Income Tax Act, the purpose is to prevent double taxation of profits—not to completely exempt the payment to the ultimate beneficiary from taxation. This is the key point on which most disputes fail.
The subjective component examines whether the conditions were created artificially. Here, the Supreme Administrative Court uses the definition from its judgment file no. 2 Afs 178/2005: the main purpose of a transaction is a purpose that, compared to others, is so incomparably more significant that it overshadows and marginalises them.
The difference between choosing the more tax-advantageous of reasonable alternatives and an action explainable only by the effort to gain a tax advantage is precisely the line over which disputes arise during an audit. A business owner has the right to arrange their business to minimise tax liability—the courts repeatedly confirm this. The problem arises when they cannot offer another explanation for this arrangement.
Who Must Prove What
According to Section 92(5)(f) of the Tax Code, the facts concerning the meaning and purpose of transactions must be proven by the tax administrator. This sounds like a comfortable position for the taxpayer, but in practice, it is not.
The Supreme Administrative Court formulated this very practically in its judgment 4 Afs 247/2024: although the burden of proof lies fully with the tax administrator, it is in the taxpayer's own interest to offer an explanation of the economically rational objective of the transactions. Tax authorities are not obliged to think through all conceivable variants. It is sufficient for them to convincingly justify that a particular transaction had no clear and obvious economic sense. The taxpayer knows their business situation best and can point out its specifics, which the authority simply does not know.
Translated into practice: if you respond to a request in general terms, the tax administrator will meet their burden of proof, and you will be on the defensive.
Two Things That Get Confused During an Audit—and One of Them Is a Trap
In its judgment 10 Afs 57/2026 of 12 June 2026, the Supreme Administrative Court addressed a situation that deserves the attention of anyone who thinks that an authority's mistake automatically means a win.
In that case, the tax administrator challenged both the beneficial ownership of the dividend paid by the parent company (a formal condition for exemption under Section 19 of the Income Tax Act) and the abuse of law. The Regional Court stated that the tax administrator had failed to meet the burden of proof regarding beneficial ownership—meaning this condition for exemption was not successfully challenged.
And yet, the taxpayer lost. The Supreme Administrative Court confirmed that these are two different and relatively independent concepts with their own burdens of proof. The error regarding the beneficial owner is assessed in the taxpayer's favour, but the assessment of abuse of law is conducted separately. An additional tax assessment of CZK 2,647,059 was made on corporate income tax.
This is a procedural detail that is decisive in a defence. Building a cassation strategy on a single procedural error by the tax administrator without a substantive argument about the economic sense of the structure is a path to dismissal. That is why ARROWS attorneys, when representing clients in audits, pursue both lines of defence concurrently—procedural and substantive.
Who can you turn to?
Where Holding Companies Lose: Contributions Outside Share Capital
The most scrutinised operation today is the return of a contribution made outside of share capital. The mechanism is simple and entirely legal: a shareholder provides a contribution to the company, it is booked into other capital funds, and upon a later reduction of these funds, the amount paid out is reduced by the acquisition cost of the share. If the acquisition cost is higher than the contribution, no taxation occurs.
In judgment 4 Afs 247/2024 of 15 January 2025, the courts assessed just such a chain: the payment of dividends through a holding structure to four joint-stock companies (exempt between related parties), and the subsequent return of the contribution outside share capital to the shareholder—that is, the payment of funds received from the subsidiary, but not as a share of profit, but by virtue of a reduction in other capital funds. An additional tax assessment of CZK 3,529,411 was made for 2018, including a penalty of CZK 705,882, and another CZK 10,775,958 for 2019.
There, the Supreme Administrative Court adopted a formulation that is now cited by more recent case law: the form of a contribution outside share capital allows for the extraction of financial resources from parent companies to the original shareholders without being taxed.
What is significant is what the court identified as non-standard circumstances: the personal interconnection of the shareholder across the structure, the decision of a sole shareholder to pay out from other capital funds for no apparent reason, the fact that until 2015 tax was withheld from all distributed profits, and the close time connection of the individual transactions.
An Argument That Fails
In judgment 10 Afs 57/2026, the taxpayer defended itself by arguing that, according to accounting standards, a contribution outside share capital is not reported as profit, does not affect the financial result or the tax base—and therefore no tax advantage arose.
The court rejected this. The tax advantage lies in the tax saving that would have had to be paid on the dividend if the structure with the contribution and mutual offsetting of receivables had not been chosen. The accounting classification does not change this.
If you use a contribution outside share capital as a tool for financing into the company, it is a standard and defensible procedure—we described it in the article on the capitalisation of a shareholder's receivables. But the way out is assessed by different rules than the way in. This is a difference worth consulting on before the general meeting decides.
Why One Holding Company Survived an Audit
The most valuable decision in the entire line of cases, however, is the one where the taxpayer won. In judgment 10 Afs 16/2023 of 23 July 2024, published under No. 4630/2024 Coll. SAC, the Supreme Administrative Court annulled the judgment of the Regional Court and the decision of the Appellate Financial Directorate.
The legal principle is of fundamental importance for the defence on two points. Firstly: when assessing the abuse of law in a holding structure, it is necessary to consider the legal, tax, economic, and, where appropriate, business aspects of the transactions, and to assess each case strictly individually and comprehensively. Secondly: if the taxpayer claims multiple reasons for establishing the holding company, the tax authorities must sufficiently ascertain the factual state of affairs in all respects and prove that none of the offered purposes, nor all of them together, were significant enough to outweigh the tax purpose.
In the same case, the court stated that a holding company is one of the options for structuring a business and makes sense for large corporations as well as small entrepreneurs. It also admitted that some holding companies may have only an umbrella function and this fact alone cannot automatically lead to the conclusion of an abuse of law.
What the Taxpayer Specifically Proved
The difference between the winning and losing case was not in a smarter structure, but in the quality and specificity of the reasons. The successful taxpayer stated and documented, in particular:
equalisation of the amount of business shares in subsidiaries,
a change in the financial situation of the subsidiaries,
elimination of business risks,
the departure of one of the shareholders and the financing of the sale of his share to the other shareholders,
the arrival of a new shareholder who did not have sufficient funds to purchase a share and would not have been granted a loan,
planned future acquisitions,
a detailed record of the unsuccessful negotiations of the shareholders before the holding company was established,
consolidation of the companies' loans with one bank after the establishment of the holding company,
an explanation of the purchase price of the departing shareholder's share by the fact that he did not participate in securing new liabilities.
In contrast, in the case from June 2026, the taxpayer argued the need for external financing and brand image building—and the court described its explanation as terse and non-specific. There is one more detail here that is worth noting: the subsidiary paid the parent company license fees amounting to 3% of its annual turnover for a trademark and throughout the proceedings did not explain what specifically it was paying for.
Intra-group license and management fees without documented consideration are a reliable trigger for doubts during a holding company audit. This is directly related to the arm's length principle under Section 23(7) of the Income Tax Act—we have analysed it in detail in articles on transfer pricing in a corporate group and on how to optimise contracts between entities in a holding company. For intra-group leases, the same logic is reflected in setting a price that will stand up to the tax office.
Possible Problems | How ARROWS Can Help (consultation@arws.cz) |
|---|---|
Lack of evidence for the economic reason for the holding's creation: the structure was created years ago, documentation is fragmented, and explanations remain general. | Reconstruction and drafting of a defensible justification for the structure: we will prepare an expert opinion with legal, economic, and tax perspectives and supplement the evidence while there is still time. |
Intra-group payments without documented consideration: license fees, management fees, or leases where it is not possible to describe what the group receives in return. | Review of intra-group contracts and transfer pricing documentation: we will set up the contractual documentation and prepare materials that are defensible during an audit. |
Planned payout from other capital funds: a general meeting decision without an assessment of the tax implications and the time connection to previous transactions. | Assessment of the transaction before it is carried out: we will evaluate the tax impacts and propose a variant that will stand up to scrutiny, or suggest different timing. |
An audit has been initiated or a request to remove doubts has been received: there is a risk that documents will only be submitted in court, where the court may not admit them as evidence. | Representation during a tax audit and in appeal proceedings: we will manage communication with the tax administrator and ensure that all evidence is submitted in a timely manner. |
International element in the structure: a foreign parent company with no employees and no own activity. | Assessment of substance and beneficial owner of income: thanks to the ARROWS International network, we also handle cases with a cross-border element and verify whether the structure will stand up to the economic substance rules. |
Prepare the Documentation Before the Request Arrives
The toughest procedural rule in all this case law does not concern content, but timing. The main burden of proof takes place in the tax proceedings. If you submit evidence only at the court hearing, the court does not have to admit it—and in case 4 Afs 247/2024, it did not, because the taxpayer failed to submit it to the tax administrator without a reasonable excuse. The Supreme Administrative Court confirmed this, citing the cassation nature of judicial review.
In practical terms, this means that the defence of a holding company cannot begin when the tax assessment notice arrives. Here is what should be in the file before that:
minutes and documents from the decision-making process on the structure's creation—not just notarial deeds, but also analyses, offers, expert opinions, and correspondence with banks or advisors,
records of negotiations that preceded the holding's creation, including unsuccessful ones,
contractual documents for all intra-group services and proof of what was actually provided,
a description of the parent company's function—who makes decisions in it, what it manages, what its costs are,
a timeline of transactions with an explanation of why they followed in that particular order.
If you are just building the structure, it is significantly easier—the reasons are documented at the moment they are real. We described the basic variants in the article on how to establish a holding company, and the broader framework of the line between optimisation and abuse of law in the text on abuse of law versus legal tax optimisation. For owners who are building a holding company in connection with a future sale of their company, the publication at knihaoprodejifirem.cz is a useful supplement.
What We Have Long Focused on in the Area of Holding Companies
For the ARROWS law firm, holding structures are not a topic that has only opened up with the current wave of audits. We describe and solve the individual pieces of the puzzle for clients on an ongoing basis, and each of them may be needed during an audit:
structure building—three models of a holding company and the difference between a sale and a contribution of a share in the article how to establish a holding company and in a broader view on setting up a corporate structure for holding companies,
relationships within the group—prevention of disputes in a holding company and setting up contractual relationships between related companies,
transfer pricing—we described the long-term focus of the financial administration in the text Transfer Pricing in the Sights of the Financial Administration,
payout of money from the group—profit distribution in 2026 for the year 2025, advances on profit share payments, and the limits of hidden profit distribution,
financing between a shareholder and the company—loans between the company and its owner and capitalisation of a shareholder's receivables,
tax tests for transactions—taxation of investment income and time tests and a practical guide to the transfer of a share in a limited liability company,
succession and family assets—the structure of family wealth and trusts and taxes,
sale of the company as the reason for the entire structure—a guide for the owner selling a company, or the publication at knihaoprodejifirem.cz.
For a defence during an audit, this breadth is important for one reason. The tax administrator does not assess an individual transaction in isolation, but the overall sequence of actions and the circumstances associated with it. An opinion that covers only the tax level and overlooks corporate or business contexts is therefore usually not enough—and conversely, a holding company built with regard to all these layers is much easier to defend.
Final Summary
A holding structure is neither risky nor suspicious—it is a standard way of organising a business that the Supreme Administrative Court explicitly recognises. What is risky is unpreparedness. The case law of the last two years shows a clear pattern: additional tax was assessed where the economic reasons were explained generally and late, while a structure with specific, documented, and timely recorded reasons stood up to scrutiny all the way to the Supreme Administrative Court.
For a company owner, CFO, and executive director, there is one practical conclusion. The defence of a holding company is not written after a request is received—it is created continuously, in the documents that record why you made the decisions you did at a particular moment. Additional tax assessments in the millions of crowns, including penalties, and the risk of subsequent assessment of the conduct in criminal law terms are consequences that can be foreseen and prevented.
If you are not sure whether your structure will stand up to scrutiny, or if you are planning a payout from other capital funds or a restructuring of the group, have the matter assessed before the general meeting decides. ARROWS law firm builds, reviews, and defends holding structures during audits—write to us at consultation@arws.cz.