Employment of Family Members

Why the Law Prohibits the Direct Employment of Spouses and Partners

Under Section 318 of the Czech Labour Code, no employment relationship may be established between spouses or registered partners. You cannot validly conclude an employment contract, an agreement to complete a job (DPP), or an agreement to perform work (DPČ) with them. The prohibition is absolute, and if employees marry during the course of the relationship, their employment is automatically terminated on the day of the marriage.

The reason is the historical protection of property relations and the prevention of system abuse. It is based on the principle of the joint property of spouses (SJM), where the employer would pay a salary from the joint budget de facto back into the same joint budget. For registered partners, the legal logic of property relations is so similar, despite the absence of SJM, that the prohibition also applies to them.

In practice, this means one thing: if you want to legally involve your spouse in your business, you must find another way. When choosing a specific option for involving a family member, it is advisable to also assess the labour law implications and related risks, which our Prague-based labour law team can help with. The Czech legal system offers several options, from the status of a cooperating person to establishing a legal entity. However, each has its own specific pitfalls and administrative requirements.

Alternative 1: The Cooperating Person – The Most Common and Flexible Solution

By far the most widely used model is the institute of the so-called cooperating person. In this case, one of the spouses remains the main entrepreneur with their own IČO (business identification number). The other registers with the authorities as a cooperating person, and at the end of the year, income and expenses are divided between them, which can very effectively reduce the family's overall tax burden.

In practice, it works like this: if the main entrepreneur earns one million crowns and has expenses of half a million, they can formally transfer part of the profit to their spouse. This prevents the loss of tax credits for the other spouse and often takes advantage of a lower tax bracket.

However, this transfer is subject to very strict legal limits under the Income Tax Act. We also discuss the practical setup of transfers between spouses (and their defensibility during an audit) in our article External Contractors vs. Employees: How to Correctly Set Up Contractual Relationships and Eliminate the Tax Risks of Disguised Employment.

Conditions for a Cooperating Person

For the tax office to recognise this model, it must involve genuine cooperation by a legally competent person over 18 years of age. Simply attributing income on paper to a spouse who does not help the business in any way is a circumvention of the law. According to Section 13 of the Income Tax Act (ZDP), a maximum of 50% of income and expenses can be transferred to a spouse (with the transferred tax base not exceeding CZK 540,000 per year).

For other household members (children, parents, etc.), the law is stricter. A maximum of 30% of income and expenses can be transferred to them, up to a total of CZK 180,000 per year. In addition, the cooperating person must register with the tax office (to obtain a DIČ - tax identification number), the social security administration, and their health insurance company before starting the activity. Our tax advisory team typically helps with registrations, setting up contributions, and the related tax obligations.

Tax and Insurance Implications

From the perspective of contributions, a cooperating person becomes a full-fledged self-employed person (OSVČ). If the cooperation is their main activity, they must pay regular monthly advances for social security and health insurance, even if no regular payments are physically credited to their account.

For setting up remuneration and contracts to withstand scrutiny from the Social Security Administration (OSSZ) and the tax office, our article Concurrent Roles and Remuneration of Executives: How to Set Up Management Contracts to Safely Pass Audits by the Tax Office and OSSZ may also be useful. This is where many families make a fatal mistake and generate huge debts with insurance companies.

If it is a secondary activity (the person is otherwise employed or, for example, on parental leave), social security contributions are not paid up to a certain annual profit limit. Health insurance is then paid only on the actual transferred profit achieved, and monthly advances do not have to be paid at all.

Frequently Asked Questions about the Cooperating Person

Clients often ask if the cooperating person model can be used with an s.r.o. (limited liability company). The answer is no; this solution is exclusively for natural persons (OSVČ). In the case of legal entities, the spouses are independent, the company operates as a separate entity, and the prohibition on employment does not apply to it. Therefore, you can be employed normally.

The distribution ratio for a self-employed person (OSVČ) is not fixed; you can transfer 10%, 30%, or the maximum 50%. However, the ratio must always correspond to the work actually performed. If you transfer more than the law allows, the authorities will add this surplus back to the main entrepreneur's tax base, often leading to severe penalties and unnecessary double taxation.

The lawyers at ARROWS law firm will represent you in these negotiations to ensure the structure is legally secure and makes economic sense. We will work with you to set the income and expense ratio to reflect reality and reliably withstand a tax audit. Contact us for an initial consultation at consultation@arws.cz.

Alternative 2: The Family Business – A Civil Law Framework That Does Not Replace Mandatory Registration

This concept (Section 700 of the Czech Civil Code) is more typical for traditional and agricultural families. A family business (rodinný závod) is not a separate legal entity with an IČO. It is effectively created the moment family members (spouses, siblings) living in a common household permanently work on the development of a single enterprise run by one of them.

The main principle is the right of family members to an adequate share of the profits and acquired assets. However, this does not mean you can avoid administration and tax obligations. The involved members must still have their remuneration covered either as cooperating persons or, for unrelated relatives, through standard contracts.

Conditions for a Family Business

The basic condition is direct or collateral kinship (or marriage) and primarily a common household. However, a family business is fundamentally not a way to legalise undeclared work. If the activity shows signs of dependent work, the family member must pay health and social security contributions.

The risk here lies in inspections by the State Labour Inspection Office (SÚIP). If officials find a family member working on the premises without registration, they will classify it as illegal employment. For these cases, we strongly recommend drafting at least a basic informal agreement on the arrangement of the family business.

Alternative 3: The Silent Partnership – A Sophisticated Solution for Capital Investments

A silent partnership (tichá společnost) is ideal for situations where one spouse only invests money or property into the other's business but does not actively work in it. The silent partner shares financially in the company's profit and any potential loss but does not appear publicly and does not manage its operations in any way.

The advantage is discretion and the fact that the share of profit is subject to a 15% withholding tax at the source, which is paid directly by the main entrepreneur upon payment. The silent partner does not tax this income anywhere else, and a huge advantage is that no social or health insurance is paid on it. You do not need to establish a new company; a contract is sufficient. However, in the event of a relationship breakdown, a poorly drafted document can lead to bitter court disputes over the repayment of contributions.

In practice, a thorough analysis is necessary. The lawyers and tax advisors at ARROWS law firm will ensure due diligence and the preparation of a precise silent partnership agreement before the transaction to ensure you do not risk future property disputes and tax problems.

Alternative 4: A Legal Entity with a Spouse as a Partner or Management Member

Transforming a self-employed business (OSVČ) into a limited liability company (s.r.o.) is a perfect shield against the prohibitions of the Czech Labour Code. An s.r.o. is a separate legal entity, and the ban on employing spouses logically does not apply to it. Your company can therefore legally conclude a standard employment contract, DPP, or DPČ with your spouse.

If the spouse is an employee of the company, the exact same rules for tax and insurance contributions apply to them as to any external employee. However, the salary conditions must be at market rates; if you assign your spouse an unreasonably high salary to artificially reduce corporate taxes, the tax administration will disallow these wage costs.

Practical Risks and Common Mistakes

Doing business within the family tempts a dangerous informality. Most problems arise from the feeling that 'we won't sue each other at home.' While that may be true, state authorities do not share this leniency. Missing contracts, failure to register for insurance, or improperly distributed profits result in draconian fines that can financially ruin a family.

Illegal Employment – The Most Serious Mistake

The most common and destructive mistake is involving a spouse 'off the books' to save on contributions or bureaucracy. Working without any contract or record is severely prosecuted by the state. Inspectors from the SÚIP conduct surprise checks on business premises and absolutely do not accept verbal agreements within the family.

The fines are ruinous. A self-employed person (OSVČ) or a company faces a fine from CZK 50,000 to CZK 10 million for enabling illegal work. The illegally working spouse themselves can receive a penalty of up to CZK 100,000. Furthermore, the tax office will disallow all related deductions and mercilessly tax the money.

If you do not want to risk tax reassessments and penalties, entrust the preparation of the transaction and contracts to experts. The lawyers at ARROWS law firm specialise in family law and its tax aspects and will guide you safely through the entire process. Contact us at consultation@arws.cz. 

Incorrect Setup of a Cooperating Person

When registering a cooperating person, entrepreneurs often make mistakes in basic administration. They may list their spouse in the tax return but forget to register them in time with the social security administration and health insurance company. The authorities will then not recognise this status, assess penalties, and challenge the entire tax return.

Equally risky is exceeding the legal limits for the share of profit (e.g., transferring 60% instead of the permitted 50% for a spouse). The tax administration will return the excess amount to the main entrepreneur's tax base and tax it. This can lead to unnecessary double taxation that could have been avoided with a simple calculator.

Conclusion

The employment of family members, although directly prohibited by the Czech Labour Code, has several elegant and fully legal solutions. The key to success is choosing the right model – whether it's a cooperating person for tax optimisation, a silent partnership for capital appreciation, or transitioning to an s.r.o. to maintain traditional employment contracts.

The biggest risk in a family business is administrative negligence. Verbal agreements and undeclared work will not protect you from the harsh penalties imposed by the labour inspectorate and tax authorities. If you are serious about your business, every role must be supported by perfect documentation.